Water scarcity and pricing

By Shahid Javed Burki
Monday, 22 Aug, 2011

PAKISTAN is one of the world’s most arid countries with an annual rainfall of less than 240 mm. At the same time agriculture is an important part of the economy, accounting in 2010 for over one-fifth of the gross domestic product.

Since the time of the British who invested heavily in tapping the Indus River system for irrigating the virgin lands of the Punjab and Sindh, agriculture has become an important part of the sector.

Over 80 per cent of the cropland is irrigated. Most of the important crops — wheat, rice, cotton and sugar cane — rely on surface irrigation. As discussed below some of these would not be part of the farming pattern if water was properly priced.

According to one expert, until relatively recently, “agriculture was characterised by low cropping intensity and production dominated by low-water requirement crops like food grain. During the last decade, however, the pressure on water has drastically increased with more competition for quantity and quality of irrigation water within the sector.” There is a move towards the production of high-value crops which produce more jobs per unit of water and per unit of land than traditional crops.

Pakistan has been unable to develop the capacity for storing water largely for political reasons. According to a 2009 report by the World Bank, the United States and Australia have over 5000 cubic meters of storage, while China has 2000 cubic me ters. Pakistan’s capacity is only 150 cubic meters.

Inefficient use of water that flows into the vast irrigation system that has been developed over time is another problem the country has to deal with. Of the water diverted from the river system, 96 per cent is used for agriculture while four per cent is consumed by industry and households. However, a significant part of the water that flows into the irrigation system is wasted because of its antiquated design and poor maintenance and poorly leveled fields.

More than 50 per cent of the water in the system is lost by way of evaporation or seepage into the ground. The water that seeps into the ground is recovered by half a million tube wells that have been installed over the last 50 years. Ground water pumping has increased from 3.34 MAF n 1959 to 55 MAF in 2009.Tapping of this resource is done without regulation. The result is that there is “mining” of water with the amount extracted exceeding the amount of natural recharge. About 70 per cent of the working tube wells are producing hard or brackish water which is exacerbating the salinity problem.

Climate change is also affecting Pakistan’s water situation. Glacier retreat is likely to reach 40 to 50 per cent of the area currently under ice cover and as the Pakistani rivers receive most of their flow from melting ice. This will have serious consequences for the availability of water. As the World Bank stated in a major report on Pakistan’s water resources, “while the science is still in its infancy, best estimates are that there will be 50 years of glacial retreat, during which time river flows will increase.

This — especially in combination with predicted more flashier rainfall — is likely to exacerbate already serious problems of flooding and draining, especially in the lower parts of the basin in the next few decades. But then the glacial reservoirs will be empty, and there are likely to be dramatic decreases in river flows, conceivably by terrifying 30-40 per cent in the Indus basin.” Some of the problems that are taking the country towards water scarcity can be resolved by adoption of appropriate public policies. But this, as in so many other cases, will need the exercise of political will. The level of resources needed for development — building of new storage dams and improving the system of irrigation — will have to be increased. This will require a greater fiscal mobilisation effort which means plugging of loopholes in tax structure, widening the tax base and improving the efficiency of the tax collection machinery.

With increased resources, the country will be able to commit more funds for further developing its already impressive irrigation infrastructure. Country’s political masters must gather the will to convince those who oppose the construction of such large dams as the one at Kalabagh that this type of investment is not a zero-sum game where one party’s loss is equal to other party’s gain. A well integrated system for managing the flow in the rivers will benefit all citizens.

Water pricing is another critical public policy issue that needs to be addressed in order to improve utilisation of this precious but declining resource. Pakistani farmers don’t pay the price for water that appropriately reflects the present and future scarcity value of this commodity. Charging the users on the basis of scarcity would improve the efficiency of water use in many ways. Farmers will have an incentive to level their fields to minimise the waste of water. They will also move away from cultivating such water-intensive crops as sugar cane.

Correct pricing of water for non-agricultural use is also important since both industry and households will have the incentives to minimise waste. It has been found that where water is correctly priced there is greater recycling. Israel is one of the countries that has learnt to use water with great efficiency. It is the world’s leader in developing drip irrigation.

Pakistan has paid no attention to developing a regulatory system that would watch over the use of water. For instance, the use of ground water for irrigation, manufacturing and domestic use is hardly regulated. The result is mining of water which is causing a sharp drop of the water table in many areas. To prevent the further deterioration of the situation, the policymakers need to work not only on installing the right price regime but also supporting it with a regulatory system.

Water is one of the important inputs that are now under stress because of underinvestment by the public sector. In the earlier decades, the share of water in the public sector development programme was 20 per cent of the total. In the 1990s it declined by nearly one-half, to only 11 per cent. This means that there was significant reduction in potential increase in GDP because of the lack of sufficient investment in improving the availability and flow of water for agriculture. The elasticity of agriculture growth to water is 0.48. Dealing appropriately with the problem of water scarcity is on important way for bringing health back to a sick economy.

Water scarcity and

Preparing the population for a modern economy

By Shahid Javed Burki
Published: August 23, 2011

For a country that now has the reputation of neglecting the development of its vast human resource, it is possible to reach a somewhat different conclusion about the preparedness of the workforce. When the data for the schooling of the young is examined in some detail, and in the context of what is occurring in other countries of South Asia, Pakistan seems well positioned to develop a modern economy. The data used here are from the work done by the economists Robert Baro and Jhong-Wha Lee at Harvard University. Looking at this data, it appears that compared to other large countries of South Asia, Pakistan is doing better in an area that could be tremendously important for its economic and social future.

In 2010, India had 67 per cent of the 15-plus age group in school while Pakistan had 62 per cent. However, it is at the other end of the educational spectrum — what educationists call the tertiary stage — that Pakistan seems to be doing considerably better than other South Asian countries.

In 1950, for India and Pakistan, the proportion of people attending tertiary institutions was 0.6 per cent. Since this has increased to 5.8 per cent for India, a ten-fold increase, and to 5.5 per cent for Pakistan, a nine-fold growth. For Bangladesh, the increase was spectacular, a twenty-fold growth. However, it is the impressive increase for Pakistan that provides the element of surprise.

Pakistan does well in one critical area — the drop-out rate in tertiary education. Those who complete tertiary education in Pakistan account for a larger proportion of persons who enter school at this level. The proportion is much higher for girls, another surprising finding for Pakistan.

With a considerably lower drop-out rate at the tertiary level, it is not surprising that the number of years students spend in school in Pakistan (5.6 years) is higher than that in India (5.1 years) but a bit lower than that for Bangladesh ( 5.8 years). For tertiary education alone, Pakistan’s youth spend more time being educated than those in Bangladesh and India.

It is in the last two decades that the real brake occurred in Pakistan. The proportion of the 15-plus age group receiving tertiary education in Pakistan increased from only 2.4 per cent in 1990 to 5.5 per cent in 2010. The proportion of students completing tertiary education in Pakistan is 41 per cent higher than that for India. Better performance, when measured in terms of the proportion of the population receiving tertiary education, matters a great deal for the economic future. As Baro and Lee point out, the estimated rate of return is very high for tertiary education, close to 18 per cent. This is only 10 per cent for secondary education and almost zero for primary education. The state, by only concentrating on primary education, is not buying a better future for the citizenry. It must make it possible to develop tertiary education as well.

The answer to the question — why has Pakistan done so much better than other large South Asian countries? — leads us into the realm of speculation. An argument can be made that the nationalisation of privately-managed education in the 1970s and the resulting expansion in the role of public education resulted in a serious deterioration of educational standards. This troubled the well-to-do segments of the population who had the means to pay for good education if it could be provided. This brought the private sector into education and its role expanded rapidly.

The demographic changes occurring in the West and the pressure on the state to pull back from such activities as education, research and innovation means that enormous opportunities are being created for the populous countries of South Asia. In light of the little noticed progress it has made in tertiary education, Pakistan seems well positioned to take advantage of the opportunities becoming available in the new economy.

Source: Preparing the Population

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A tripartite arrangement

By Shahid Javed Burki
Published: August 29, 2011

The West’s turn away from letting the state play an important role in shaping the structure of its economy and society will have important consequences for the entire world. Some of these will be negative, some positive. They will be positive, at least for those countries whose leaders are able to look into the future, not only to meet the challenges it will bring but also make use of the opportunities that may be on offer.

Some of the public policy choices should be made in the context of the three large countries of mainland Asia — China, India and Pakistan. They will have to be tailored to meet their own needs and circumstances. China will need to work out how it will continue to make the transition to an open market while continuing to limit the openness of the political system. It will also have to determine the role it will have to play in shaping the global economy, now that it has become the worlds’ second largest economy and may, by 2015, overtake the United States.

India, after a remarkable two-decade long record of uninterrupted high rate of economic growth is losing some of the momentum it had picked up in this period. Large segments of its population remain unaffected by the economy’s rapid growth. In the middle of 2011, the country was convulsed by the popular reaction to several incidents of large-scale corruption on the part of senior elected officials and by the officers of the military. Being a vibrant democracy it will have to find a way out of the resentment that has built up within a short period of time.

Pakistan, the third country in this group has the weakest economy, a highly troubled society and an unsettled political system. Some have said — including Hillary Clinton, the United States Secretary of State — that the country is faced with an existential threat. The World Bank’s 2011 World Development Report includes the country among what it regards as fragile states. It is in the strategic interest of its two very large neighbours — China and India — to ensure that the country does not stumble so badly that it succumbs to the eventual control by the extremist forces that are operating in the country. A fracturing — even a greatly unstable — Pakistan will not be good for its neighbourhood, certainly not for China and India.

Some of the responses by the mainland Asia to the developing situation in the West will, and should, take the form of bilateral relationships — Pakistan working with China, China working with India and India working with Pakistan. Some of this is happening. Snubbed by the United States, Pakistan has turned to China for economic assistance, military support and simply for some encouragement in what Islamabad considers to be a very ‘unfriendly world’. The two countries have developed what both call an “all weather friendship”. While Beijing is reluctant to get very involved in Pakistan’s growing rift with the United States, it is prepared to give signals to the world that it supports Islamabad in many different ways.

While both Beijing and New Delhi continue to watch each other with some suspicion; while India remains disturbed that China continues to hold some of the territories it considers its own and has not withdrawn its claim to the Indian state of Arunchal Pradesh; and while Beijing is unhappy that New Delhi has given refuge to Dalai Lama from where he continues to operate, the two countries have learnt to work with one another. This is particularly the case in bilateral trade which has grown rapidly and now amounts to over $40 billion.

Notwithstanding these bilateral responses by the three countries to the enormous changes in the global economy, there is also some space for the three countries to work together. Not only do they account for 40 per cent of the world’s population, they also cover a good part of the world’s total area. This trilateral relationship will have to develop institutional underpinnings in addition to the improvements in the trade and communication links that already exist.

Source: A Tripartite Arrangement

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Main tu aik Baab hn Tareekh mein Likha jaon ga

The state in South Asia

By Shahid Javed Burki
Published: September 5, 2011

There are many political forces in the West — mostly in the Anglo-Saxon world — that are posing serious questions about the role of the state. How big should it be; what should be its functions; how much space should it surrender to the private sector? Should some of the functions the federal government in the United States has acquired be the responsibility of the state governments? Did the American founders, while writing the constitution of the country, wish to keep the government close to the people? If that is the case, shouldn’t the federal government step back and allow the states to perform the functions that are legitimately and constitutionally theirs?

Similar questions are being asked in Britain but in a somewhat abstract form in the absence of a written constitution. In light of all this, there is a serious effort in many parts of the West to push the state back from some of the space it now occupies. If that were to happen — and there is a strong probability that it will — this new and considerably limited role of the state in many western societies will create opportunities for the populous countries of South Asia if the countries in the region work together and come up with a new strategy of growth. This is where demography enters the picture.

There is a profound asymmetry in the way demographic situations are developing in the West and in the populous countries of South Asia. The rate of human fertility has declined sharply in most countries in the West. The result of this is that a number of countries are now seeing the size of their populations declining while those in South Asia will continue to increase for several decades. The South Asian populations will remain young for several more decades while those in the West will age rapidly. The demographic change in the West will have two consequences. One, it will not have young people in the number needed by the economies where knowledge rather than material inputs are the main contributors to growth. In most western countries, the structure of the economy is dominated by the service sector and within the service sector by knowledge intensive activities. This means that the workforce needed for these types of economies must be very well-trained in modern skills. This also means that the state and the companies must invest large amounts in research development. Some of the major developments of the last few decades, including the development of the internet, became possible with the heavy involvement of the state.

Government support for research, development and skill development would be placed in jeopardy if political forces such as the Tea Party Movement in the United Sates carry the day. This would seriously compromise the ability of the United States and other western countries to deliver the services and products the citizens of these countries need and will demand. This is where the populous countries of South Asia enter the picture. If they can organise their own governments to produce the manpower needed by the new economies, they should be able to fill the gap and become major suppliers to the West. However, before they are able to do this, they will need to have an effective state that can prepare the citizenry to take up this challenge and realise its opportunity. Unfortunately, most South Asian states, for several different reasons, are seeing the weakening of the state.

There is now palpable unhappiness on the part of the citizenry in Bangladesh, India and Pakistan with the working of the state. In Bangladesh, the state has been weakened by the enormous rivalry between two political groups that have been fighting it out to control the state. In India, there is popular disgust at the incidents of major corruption committed by senior public officials, both elected and non-elected. In Pakistan, the civilian government has not proved equal to the task of handling the various problems the country faces.

The obvious conclusion to be drawn from this is that while the West is presenting an extraordinary opportunity to turn South Asia’s young populations into enormous economic assets, the South Asian states themselves will have to improve their performance. Those who are weak states will not be up to the challenge.

Source: State in South Asia

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Kon Kehta hy k Main Gum-naam ho jaon ga
Main tu aik Baab hn Tareekh mein Likha jaon ga

An economy of shortages

By Shahid Javed Burki
Monday, 05 Sep, 2011


TODAY, more than three years into the rule by the current government, the Pakistani economy is beset by a number of shortages. All of them are critical. Without concerted effort to overcome them, they will do a huge amount of damage to the economy.
Pakistan can be appropriately described as a “shortage economy”. It is short of its own saving to promote development. That makes the country dependent on external capital flows which tend to limit the freedom of manoeuvre in the field of international politics.

It is short of a skilled workforce because of the poor quality of its educational system, particularly in the public sector. This means that the country is not able to take full advantage of its large and young population. It is getting close to being classified as a “water stressed” country with projected sharp declines in the amount of water that flows through its rivers. This will be the consequence of climate change which, according to a World Bank report, will melt a significant amount of its glacial cover.

It has had to deal with serious shortages of electricity which has resulted in great deal of discomfort for all but particularly those who don’t have the resources to generate their own supply of power. And, it is now faced with a growing shortage of natural gas – a natural resource in which the country once had a large surplus.

What is common with all these shortages is the failure of public policy not just by the government that currently holds the reins of power. This failure has been a constant in the story of Pakistan’s economic development. In the case of each of these five shortages – domestic finance, trained and educated workforce, water, electricity and natural gas – the various administrations that have been in charge failed to address the posed problem from strategic perspectives.

The history is punctuated with ad hoc policy responses. Policymaking was motivated by “short-termism”. This “patchwork” approach to policymaking has had a profound negative impact on the performance of the economy.

The country will continue to under-perform and fail to realise its full potential unless the policymakers adopt a strategic approach. What is required is the right of kind of institutional mechanism that functions for each of these shortages within a consistent and coherent policy framework.

Natural gas is one of the critical inputs that is now in short supply. In recent years there has been a sharp increase in its demand. The increase in the demand is largely the consequence of the price regime the government had adopted for the use of this important resource. The price charged from various users did not reflect is re al cost in the international market which should have been done in terms of oil equivalence.

The price instead was determined by the cost of bringing the gas out of the ground and sending it through pipelines over long distances. The result was that it was under-priced with reference to all other fuels. There was a big switching to gas from other fuels. Industrial users and power producers shifted from oil to natural gas; households moved from its use to coal and wood.The substitution of gas from wood was benefi cial since it slowed down deforestation in the country which has been going on at an alarming rate.

It was with the discovery of the gas field at Sui, Balochistan in 1952 that Pakistan entered the field of major suppliers. Pakistan with estimated reserves of 849 billion cubic meters (bcm) is the 28th largest gas reserve country.

India with over 1.05 trillion bcm is just above Pakistan. It is in the 25th position. Bangladesh with 195 bcm is the 45th the largest producer.The largest producers, of course, are Russia (47.5 tcm), Iran (29.6 tcm), Qatar (25.4 tcm), Turkmenistan (7.5 tcm), Saudi Arabia (6.1 tcm) and Nigeria (5.2 tcm). Interestingly four of the five largest producers of gas are Muslim countries. In spite of its rapid depletion, Sui remains the largest field in Pakistan with reserves of 20 bcm or about onefourth of the total for the country. Put into operation in 1955, it supplies 26 per cent of Pakistan’s total daily consumption. Other large fields in the country are at Qadirabad, Sawan, and Kadanwari, all in Sindh. The northern areas of Punjab have a combined oil and gas field at Toot.

The consumption of gas has been increasing at the annual rate of seven per cent over the last four decades. However, demand has increased at a higher rate, 7.5 per cent in the past decade compared to 4.9 and 5.9 per cent respectively in the 1980s and 1900s.

This increase is largely the result of greater gas consumption by electric power plants. According to one estimate the overall income elasticity for gas demand is high, at 0.86 while the price elasticity is low, at 0.05. Given these elasticities, the demand for gas is likely to increase at a rate of 5.5 to 6.0 per cent year.

“The gap in demand and supply is likely to increase by 342 mmcft by 2014-15 if the supply increases at an annual rate of one per cent. If, on the other hand, there is no increase in supply, the gap will increase to 408 mmcft over the next five years.

The cost to the economy of this shortfall could be as high as Rs110 billion, or 076 per cent of the gross domestic product. There are several reasons why such a severe shortage of gas has appeared. Exploration has not attracted much foreign capital largely because of political uncertainty and the fact that potential exists in the parts of the country where security is a problem.

The large but now depleted gas reserves at Sui in Baluchistan need deeper drilling for which both foreign capital and expertise are needed. According to the IPP’s 2010 report, “16 gas fields having estimated reserves of 2tcf are lying dormant.” Both internal exploration – including in the sea – as well as connecting the country with some very large producers outside the borders should help in resolving the supply problem. Two international pipelines are being planned; one to connect Pakistan with Iran, the other to link the country with Turkmenistan.

The first was initially planned as a three country link, Iran, Pakistan and India. However, it ran into problems; pricing issues including payments to Iran as well as the payment of transit fee by India to Pakistan. The other problem was the imposition of economic sanctions by the United States on Iran that has kept large American companies out of the project.

Generally, Washington does not favour countries it considers its friends to deal with Iran for promoting large commercial ventures. The IPI pipeline falls in this category. Now that New Delhi has close relations with Washington, it has decided to opt out of this project. Pakistan, on the other hand, with difficult relations with the United States, is pressing ahead with it.

Tackling the various shortages should, therefore, be a high priority for the government. The price for not moving expeditiously will be very high; it will be paid in terms of the continuation of the slow rate of economic growth, increase in unemployment and hence in poverty, and of further marginalisation in the global economy.

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Good governance issues in South Asia

By Shahid Javed Burki
Published: September 12, 2011

The pressure by the citizenry in two South Asian states to improve the quality of governance is taking two different forms. There are different reasons for popular discontent. In India, the problem lies in the way the fruits of extraordinary economic growth have been distributed among different segments of the large Indian society. Some people and regions have benefitted more than others. Some 50 years ago, political economists began to warn countries in the developing world, that were beginning the process of ‘planned development’, that high rates of growth can — in fact often do — produce societal tensions that cannot be absorbed by weak political systems. That was the case in Pakistan with Ayub Khan, when the regime he headed collapsed quickly and unexpectedly.

The much stronger Indian political system would have been able to deal with the adverse distribution consequences of rapid growth if another perception had not gained ground — that some of what made the rich very rich were not the consequences of risk-taking entrepreneurship, but the monetisation of close contacts with the policymakers. This group includes India, but not Bangladesh and Pakistan.

India, of course, produced in quick successions two egregious examples of the personal wealth created because of influence over government policymaking. The first was the estimated loss to the government of perhaps as much as $40 billion by the grant of mobile phone licenses to a number of companies favoured by the minister in charge in the government headed by Prime Minister Manmohan Singh. Under pressure from the citizenry, the minister had to resign his position and landed in jail. This “large amount of money for favours” episode happened under the watch of the prime minister representing the Congress. But it quickly turned out that such practices were not confined to one political party. Soon after the mobile-phone scandal became public, it came to light that governing members of the opposition Bharatiya Janata Party had their hands in the till as well.

There are deep concerns about the quality of governance in Pakistan as well. However, since the economy has been stagnating, there are not many rewards of growth that can be captured by narrow and powerful political elite. The Pakistani concerns are focused entirely on different aspect of governance. It is on the absence of quality governance by the legal and judicial systems. Those in Pakistan, who have focused on this aspect of good governance, have concentrated their efforts on ensuring judicial autonomy and on the reform of the legal system where it comes into contact with the common citizenry. The activists have been more successful in obtaining some movement in the former case — judicial autonomy — than in the latter, reform of the legal system.

The country’s sordid political history when the senior judiciary — the provincial high courts and the Supreme Court — were quick to give cover to palpable misuse of executive power to ride roughshod over the constitution of the day created a powerful precedence. This trend started under Chief Justice Muhammad Munir in the 1950s when he brought forward the “doctrine of necessity” to justify the dismissal of the constituent assembly by Governor-General Ghulam Muhammad. This line of thinking was happily followed by a number of successor courts when called upon to rule over the acquisition of authority by the executive at the expense of the legislature — sometimes also at the expense of the judiciary itself.

This has led to the growth of two very different citizens movements in these two South Asian countries. The focus in India in the campaign led by Anna Hazare, a Gandhian, is focused on creating an accountability mechanism that will be free of influence of the executive and legislative branches of the government. In fact, it will also have a degree of autonomy from the judiciary, the third arm of the government. If the Hazare movement succeeds in achieving its immediate objectives, it will have consequences for the working of the Indian democracy. This worries even the liberal community in India and also liberal watchers outside the country. In Pakistan, however, the concentration of citizen’s effort has been on getting an autonomous senior judiciary to watch over the working of the executive and legislative branches of government. The activists seem to have concluded that given the country’s poor record with accountability mechanisms, concentrating on judicial independence is the way to go.

Source: Good Governance Issues

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Main tu aik Baab hn Tareekh mein Likha jaon ga

Employment-spending cycle

By Shahid Javed Burki
Monday, 12 Sep, 2011

CONFIDENCE plays an important part in the health of an economy. When people are optimistic they spend more and save less. This increases the demand for goods and services. That leads businesses to hire more in order to meet the greater demand.
Increase in employment raises spending even more and that leads to another investment-employment-spending cycle. The reverse happens when people lose confidence which is the case now in both the developed and the developing parts of the global economy.

Employment is not increasing in most parts of the world economy. In the United States it is stuck at a bit more than nine per cent of the work force. Experts believe that there is a fifty-fifty per cent chance of another dip in economic activity. How should policymakers respond to this developing situation?

One important legacy of the Great Depression of the 1930s was the development of policy tools that could be used to take care of economic downturns. Such downturns are inevitable. They are part of the way capitalist economies function and develop. These business cycles could be tamed by the use of monetary and fiscal instruments. Which of these two was used depended upon the taste and ideologies of the policymakers.

Those of Keynesian disposition were inclined to use the budget to reduce the adverse consequences of the cycle. The government could pump money into the economy and create jobs for the unemployed which would increase aggregate demand and provide incentives to the private sector to start investing again.

The monetarists — or Friedmanites, after the economist Milton Friedman — preferred to use money supply to tune the economy. The central bank lowered interest rates by printing money and money’s lower cost provided the needed incentive for private entrepreneurs. Those in favour of this approach argue that the use of monetary instruments acted quickly whereas increasing public expenditure had longer time lag between policy action and desired results.

In either event, the cycles were short; mostly of “V” type. In most of the cases after the Second World War, the down turns were sharp but so was the recovery. Plotted on a chart, economic activity had a “V” shape. The economies quickly returned to the level of activity they were at before the downturn.

This has not happened with what was called the Great Recession of 2008-09. It was great because of the severity of the collapse of economic activity in all industrial countries. The sharpest decline in real GDP occurred in Japan with a fall of 10 per cent from the first quarter of 2008 to first quarter of the following year.The gentlest fall was in France with a decline of four per cent. The United States with five per cent and Germany with seven per cent came in between these two extremes.

Policy response to this event was a mixture of fiscal and monetary instruments. The governments acted together to provide fiscal stimulus to the economies.The central banks brought interest rates to near zero. The result was mild recovery in all Western economies. However, none of the economies regained the levels achieved before the downturn began. The United States was at the nearest point in the first quarter of the current calendar year while Japan, having recovered to four per cent below the start of the recession, dipped again to about six per cent decline. The GDP growth estimates for the United States in the second quarter of 2011 indicated a slowdown in recovery.

This led some to talk about a “W” shaped recession — a drop in activity followed by a mild rise, followed again by a decline, followed once again by mild recovery. However, some economists believe that it was premature to declare that the Great Recession had ended in the first quarter of 2009. A more accurate way of describing it would be to call it a “U” shaped recession, with a long and flat bottom. If this is the correct interpretation, what are the options available to those who make policy? This is where politics enters the picture.

With interest rates set near zero and with the Federal Reserve, the United States central bank, having declared that they will stay there for at least a couple of years, the only monetary instrument left is something called “quantitative easing”. The Fed has undertaken two of these — QE1 and QE2 — but there is political pressure on it not to go that route a third time.

In fact, Rick Perry, the leading Republican contender for President Barack Obama’s job in the elections of 2012 has warned that he would regard QE3 as a treasonous activity. While toning down his rhetoric a bit in the first Republican candidates’ debate on September 7 at the Ronald Regan Centre, he stuck to his basic position.

The ugly wrangling over the decision to raise the level of public debt in the United States means that another fiscal stimulation is not an option either. The Europeans have severe problems of their own with a number of weaker economies in the Union close to bankruptcy.This helplessness in the West has turned the attention of some analysts towards emerging markets. The European banks are under great stress having acquired significant amount of government debt issued by weak economies.

Much of this debt has been classified as “junk” by the rating agencies.

Since the downturn began, but especially after the weak recovery from it, the shift in economic power from the developed to the developing world is quite apparent. The International Monetary Fund has estimated that the output of developing Asia — which means all of Asia not including Japan — was seven per cent higher in the first half of 2011 compared to the level at the beginning of the recession.

The estimate for Latin America is two per cent higher. This has obvious implication for the share of developing countries in world output.The emerging markets are expected to account for 38 of global output by 2016 compared with just 25 per cent in 2007.This means that these economies are likely to increase their share in world product by 13 percentage points within one decade. Could they be relied upon to stimulate global economic activity?

The answer is not for the simple reason that together emerging markets have a current account surplus with the rest of the world. For them to stimulate global economy they need to run deficits. This is not likely to happen especially with China in the lead. A major adjustment in the Chinese exchange rate would act as a major stimulant for the global economy. If that were to happen, China will buy more from the West rather than run large trade surpluses with it.

But the Chinese have resisted the pressure on them — which was intense at times — to increase the value of their currency. The IMF’s projection is that China will go in the opposite direction with the current account surplus rising from 5.7 per cent in 2011 to 7.8 per cent in 2016. South Asia is also weakening because of the palpable decline in India which makes up 80 per cent of the region’s output.The Pakistani economy remains weak mostly because of security concerns and unsettled politics.

The conclusion is obvious but disturbing: it is politics that is keeping the West and the emerging world from responding to the economic challenges it faces. To paraphrase James Carville, an advisor to President Clinton, “It is politics, stupid rather than economics".

Employment-spending cycle

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The Pakistani ‘state’ under stress — I

By Shahid Javed Burki
Published: September 20, 2011

The state of the Pakistani state is currently weak and is becoming weaker with every passing day. To understand what is happening, it would be useful to look briefly at the country’s roller-coaster political history which has resulted in confusing the meaning of the state as understood in Pakistan. In going into the history, I will also briefly write about a conversation I had with President Ziaul Haq a few weeks before he was killed in an airplane crash.

Look at any dictionary for the meaning of ‘state’ and clues begin to appear why this particular organism is so much under stress in most parts of the world. My dictionary attaches many meanings to the word ‘state’. It says: “It is the supreme public power within a soverign political entity”. Or is it? In some of the South Asian nations, the state can no longer be said to exercise the supreme authority given to it by the basic law of the land — the constitution. Competing sources of power have emerged. This is particularly the case in Pakistan.

Is the state the supreme public power in the soverign entity called Pakistan? According to the second dictionary definition, the state is “the sphere of supreme civil power within a given polity”. According to this definition, the state is equated with civilian authority and that authority is put into place by the people through elections. It is widely known — at least widely understood — that on several matters, the legally constituted state in Pakistan does not exercise the powers given to it by the 1973 Constitution. On issues pertaining to external security and on matters concerning India, the elected government does not have the ‘supreme authority’. It must listen to the military and within the military to the army high command.

The other example of the state not performing its functions as defined by law also comes from Pakistan. On two occasions, the ruling authority — in both cases a military leader who usurped power — amended the constitution to make the president rather than the parliament the supreme authority in the country. This was done by General Ziaul Haq’s Eighth Amendment to the constitution adopted on November 9, 1985. The amendment shifted the locus of authority from the parliament to the president. A provision was added to Article 48 according to which “the validity of anything done by the president in his discretion shall not be called into question on any ground whatsoever”. To this provision was added a new clause to Article 58 according to which “the president may dissolve the National Assembly in his discretion where, in his opinion, a situation has arisen that the government of the Federation cannot be carried out in accordance with the provision of the constitution and an appeal to the electorate is necessary.”

General Zia used this provision in May 1988 to dismiss Prime Minister Muhammad Khan Junejo and dissolve the National Assembly. The dismissal came with the announcement that general elections would be held in October as provided by the amended constitution. However, the president had no intension of keeping his word. He told me, in a meeting I had with him, on July 30, in his office in Islamabad, that he was working on drastically changing the constitution by going in for a presidential form of government. The country was to be divided into 20 provinces, each to be administered by an appointed governor. This, he said, was recommended by a commission he had appointed under one Justice Ansari. He provided me with this information after offering me the position of finance minister in the caretaker government he had put into office after dismissing Junejo. When I demurred saying that I wished to continue with my job at the World Bank, he said with a smile that he knew why I was reluctant to accept his offer. “You think elections will be held in October and I will hand over power to the elected prime minster. None of this will happen. I am going to be around for a long time”. This was the last time I met him. He was dead within less than three weeks of this meeting.

Under the eighth amendment President Ziaul Haq, in other words, had acquired almost dictatorial powers. This provision remained and was used three times by two of his civilian successors. It was removed by the 13th Amendment to the constitution approved in 1997, when an elected government with a large mandate took office. It was reinstated by the Seventh Amendment, introduced into the constitution by General Pervez Musharraf, the fourth military man to govern the country. This was adopted on December 17, 2003 before the army chief of staff was prepared to share power with an elected parliament. The amendment restored the powers of the president to dissolve the National Assembly and dismiss the prime minister. It also incorporated 10 laws into the sixth schedule of the constitution, four of which established the system of local government in the provinces. These laws “could not be replaced or amended without the previous sanction of the president.”

This encroachment by the president into the powers of an elected parliament was removed for the second time by another amendment — the 18th Amendment — adopted by the parliament, elected in February 2008. The amendment was approved in April 2010 and signed into law by President Asif Ali Zardari on April 2010, a year and a half after being elected president.

Has the 18th Amendment restored a parliamentary form of government in the country? The answer is no, since the president continues to wield power that goes beyond that permitted by the constitution. He does that by virtue of the fact that he is also the head of the political party that has the largest presence in the national assembly. The prime minister, the constitutional head of the government and directly elected by the people is, in practice but not in terms of law, subservient to the head of the state, who is indirectly elected. In other words, in practice, Pakistan is not being governed according to the basic law of the land. The supreme power in the state is in the hands of a state functionary who is exercising power that goes beyond that sanctioned by the constitution. This confusion about the locus of power hurts the working of the state and is weakening it.

Source: The Pakistani State under Stress

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Towards a multiple reserve currency system

By Shahid Javed Burki
Monday, 19 Sep, 2011

THE global financial system is fast losing confidence in the US dollar. The disenchantment with the once mighty dollar may come as a surprise only to the people in the United States, including those responsible for making public policy. Elsewhere it is treated as a fact of life in the new global economic order.
Given the way the world economy is restructuring — the United States is losing its preeminent economic position while some of the large emerging markets are gaining on it — the American dollar cannot remain the dominant currency in the global market place. The world is headed towards a system of multiple reserve currencies.

How soon will this change happen? The answer to the question is “not very soon”. It might take a decade or two but there can be little doubt that the dollar will be joined by a number of other currencies nations around the globe will use for making transactions. Given its economic and financial difficulties, Pakistan will have to be a passive player in the new currency game. As discussed below, it will have to look to Beijing for guidance.

The emergence of the dollar as the sole reserve currency happened quite quickly as the Second World War drew to a close. At that time, the European nations were in debt to the US, owing it large amounts of money.The US was prepared to forgive a part of the debt in exchange for an international monetary system it could control. This led to the creation of the Bretton Woods system in which all currencies were pegged to the dollar while the US pledged to settle any claims the world had on it in terms of gold which was to be traded at the fixed rate of $35 to a troy ounce.

A new institution, the International Monetary Fund, was established to administer the system. The US obtained veto power over the decisions the Fund would be making; any change in the “articles of agreement” — the Fund’s charter — would not be made without the consent of Washington. The United States thus emerged as the world’s economic leader, unchallenged by any other state.

The Bretton Woods system lasted for a quarter century. In 1971, President Richard Nixon took the unilateral decision to un-peg the dollar to gold. After his move, the US was no longer obliged to settle its account in gold if that was demanded by the creditors states.

At that time Germany and France had large balances in their favour and there was a fear in Washington that they may want those to be settled in gold. Had that been demanded by Bonn and Paris, it would have nearly emptied the US gold reserves. The US moved unexpectedly and the Europeans were left with heavy losses in terms of the value of their US assets in gold since the price of the metal climbed quickly after the announcement by President Nixon to de-link the dollar.

This memory of the demise of the Bretton Woods system lives even after half a century. The countries that will see their currencies become international reserve currencies would first want to create an in stitutional structure in which no country has the veto over decisionmaking. This would mean a major change in the way the IMF now works. A reformed Fund would have to have sharing of power and policymaking on the basis of consensus. With no Second World War type of emergency being confronted by the international community, the reform of the Fund would take time.

It will also take time since learning a lesson from the Standard & Poor’s downgrade of the United States – the agency brought the rat ing of the US government debt a notch, from AAA to AA+ — the holders of large foreign currency reserves will want to have a say in the way the large countries with reserve currencies manage their fiscal systems.

Most of the large reserves are held by the countries in Asia but they have, at best, played a marginal role in global financial affairs. The Chinese have already laid the ground for increasing their influence. They, for instance, asked the United States to better manage its budget and reduce the amount of debt the country has accumulated over time. They have given the same advice to Europe. In both cases they were heard but with some resentment.

The new multiple currency reserve system will, in all probability, be built around four currencies – the dollar, the euro, the Japanese yen, and the Chinese renmenbi. Among these, the Chinese currency is the only one that is not fully convertible. It will have to be that for it to become a reserve currency. This too will take time. The Chinese have a strong preference for moving with great care when it comes to adopting major changes in the way they manage their economy. They call it “crossing the river by feeling the rocks”.

They also like the change that has been tested first in pilot projects. This is the way they reformed land ownership in the countryside and the transformation of some of the state-owned enterprises. In moving to towards the convertibility of the renmenbi, the Chinese are also feeling the rocks. They have opened the Hong Kong market to some extent for international transactions in renmenbi. They are also negotiating currency swap arrange ments with a number of trading partners in which payments will be made in local currencies rather than in the dollar or the euro.

Pakistan is included in the group of countries with whom the Chinese would like to conclude a swap arrangement that would cover part of the trade between the two countries and would remain in place for three to five years. Beijing is working on these arrangements with the countries in its immediate neighborhood not with the countries with which it has large trade balances.

For these reasons, it is clear that while the days of the dollar being the predominant currency in the international market place are numbered, the transition to a new system will happen very slowly. Given the uncertainty that currently surrounds the future of the dollar, some ad hoc arrangements will be made until the new system is formally ushered in. This will take a while in normal circumstances but that may not be the case if the world economy plunges once again into a recession making the slowdown that began in 2008 into a double-dip event.

Even if that does not happen, new competitors will arrive on the scene to challenge the dollar. According to one analyst writing for the Financial Times, “the currencies that are appreciating the most are part of the emerging China bloc, such as the Aussie dollar, the Brazilian real, and, increasingly, the Canadian dollar at a time when China’s economic performance continues its fine balancing act.” Some of the other currencies in the region in which China now is the dominant economy, may also become a part of the bloc.These include the Korean won, the Thai Baht and the Singaporean dollar.

Towards a multiple reserve currency

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The Pakistani ‘state’ under stress — II

By Shahid Javed Burki
Published: September 25, 2011


I return to the subject I introduced in this space last week. In the previous article, I suggested that the state in Pakistan is not organised the way it should be; it does not function according to the meaning that is generally attached to the word ‘state’ in most dictionaries. Nor does it tally with the expectation political scientists have about the functioning of democratic states in the developing world. What is present in Pakistan today, is a confused state of affairs about the legitimate functions of government. There are good reasons to raise a number of questions about the functions of the state: what should they cover, who should perform them and from where they should be performed? I will ask what I consider to be important questions; the answers to them will be implicit in the way the questions are phrased.

History is one reason why the confusion about the meaning of the state prevails in Pakistan. Often, those who had become responsible for the state — or had made themselves responsible for it — did what they were not expected to do. They undermined the basic law of the land. On two occasions the constitution was abrogated, in both cases by military leaders who were convinced that their mandate for taking those decisions was implied in the positions they occupied. On a number of other occasions the constitution’s basic structure was seriously compromised. It is happening once again, since, the locus of executive authority rests with the person and in the place where it shouldn’t be under the constitution, as amended recently.

That Pakistan has a long history of deliberately confusing the assignment of responsibility to various actors in the functioning of the state is not good enough reason to continue with this practice. Lack of clarity about the locus of power is particularly troubling at a time when the country is dealing with so many crises at the same time. Pakistan is now in the eye of a perfect storm. As I write this, The Washington Post reports on a series of meetings held between the senior American and Pakistani leaders. US Secretary of State Hillary Clinton, met with Pakistani Foreign Minister Hina Khar in New York; Admiral Mike Mullen, chairman US Joint Chiefs of Staff, met with General Ashfaq Kayani, Chief of Staff of the Pakistan Army in Madrid; and David Petereus, Director of CIA met with Lt. Gen. Ahmed Shuja Pasha, Director of ISI, in Washington. While these meetings were being held, Leon Panetta, the new Secretary of Defence in the Obama administration, issued what the American press called an ultimatum to Pakistan. Islamabad was being asked to move against the Haqqani network operating out of North Waziristan. It was held responsible for the recent attack on the American Embassy in Kabul and possibly also for the assassination of Burhanuddin Rabbani, who was attempting to negotiate with the Taliban on behalf of the government in Kabul and the US. It is clear that Pakistan is now in America’s cross-hairs. Will Washington move against the country, if Islamabad does not, to do its bidding?

It is not clear who has the responsibility of crafting an appropriate Pakistani response to the pressure from the US. Does the responsibility rest with the prime minister and the parliament as it should under the constitution or is the president in charge? The constitution assigns the president a very limited set of responsibilities. If he is calling the shots from where does he draw that authority? Is the military formulating the policy response to the Americans? If so why?

Then there is trouble brewing on the economic front. Pakistan appears to have decided to terminate its relations with the International Monetary Fund. This will not only deprive the country of some $4 billion of additional money which remains undisbursed from the arrangement concluded in 2009. It will seriously limit the country’s access to other sources of official finance. Once again it is not clear who took the decision and for what reasons. Did the cabinet decide to walk out of the arrangement? Was the decision the result of the reading by the politicians in power that they did not have enough clout with the citizenry to do what the Fund wanted Pakistan to achieve: to raise enough resources from within the economy to provide the government the money it needs to fulfil its many basic functions. Whoever took the decision to walk out of the Fund arrangement should have looked at the alternatives that are available for financing the legitimate functions of the government. If the politicians do have some alternatives in mind, what are they and how will they be tapped?

Pakistan is once again dealing with devastating floods caused by rains that were expected. Were preparations made to save the people from being hurt once again after they had suffered so much from the Great Flood of 2010? What were the lessons learned from the government’s handling of the disaster last year and how were these applied for managing similar emergencies?

Have the policymakers given any thought to creating an institutional mechanism for dealing with the type of emergencies and crises the country faces? Most countries have some variant of National Security Councils that pull in various functionaries from different branches of government as emergencies arise. Such an institutional structure exists in countries as diverse as the US and India. In both cases, high quality staff does the background work to facilitate the making of policy. Such an institutional structure was in place when General Pervez Musharraf was the head of the state. It functioned for a brief period when the current rulers came to power. In both cases the councils were not adequately staffed. Why was this mechanism for providing professional backing for serious policymaking done away with? Could it be that the ad hoc way of policymaking suits the temperament of those who deal with the affairs of the state at this time?

Pakistan is too large a country and faced with just too many crises to handle state matters with such casualness. The questions raised here and several other that are also important need to be asked and the policymakers who are determining the future of 180 million people need to provide some convincing answers.

Published in The Express Tribune, September 26th, 2011.

The Pakistani

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