By Shahid Javed Burki
Monday, 31 Oct, 2011


| ePaper | DAWN.COM

A new paradigm

By Shahid Javed Burki
Published: November 7, 2011

The decision on November 2 by the Pakistani cabinet to grant the ‘Most Favoured Nation’ (MFN) status to India in matters pertaining to trade is a tectonic shift in the country’s relations with its large neighbour. India awarded the MFN status to Pakistan in 1996 soon after joining the World Trade Organisation. Pakistan was also obliged to give to all members of WTO — and that included India — the same status. But Islamabad refused to act, in the mistaken belief that it could use it as a lever to get concessions from New Delhi on Kashmir. As most economists have argued, improving trade and economic relations with India would bring greater benefits to Pakistan, the smaller of the two economies, than to India. If trade were to be used as a lever, India has greater power than its neighbour, Pakistan.

The Pakistani decision concerning the grant of MFN status was received with enthusiasm by the Indian leadership. Anand Sharma, India’s commerce minister, hailed it as part of a “paradigm shift” and said that New Delhi “deeply appreciated” the move. It will be beneficial for both countries, he said. Pakistan’s initiative had the support of its powerful military which had continued to look at India with suspicion. The Pakistani military’s approval was implied by Firdous Ashiq Awan, Pakistan’s information minister in announcing the cabinet’s decision. “This was decision was taken in the national interest and all stakeholders, including our defence institutions were on board” she told the press.

The business community on both sides of the border applauded the move. Many believed that there will be almost immediate benefits in terms of reducing the transaction costs of doing business between the two countries. The Federation of Indian Export Organisations estimated that trade between the two nations could double from current levels of about $2.7 billion a year simply by the rerouting of goods currently sent via Dubai and through some other channels. But according to one newspaper report, “the Confederation of Indian Industry cautioned that road blocks such as stringent visa rules, non-tariff barriers and communication problems still need to be dismantled and more trade routes opened up” for full benefits to be realised.

But the real significance in this breakthrough will go much beyond increasing India-Pakistan trade. It will provide foreign policymaking in Pakistan with a new base, moving the country away from total preoccupation with the United States. At this time, relations with America have become highly strained. Improving relations with India will certainly help to place the dealings with Washington in a new context. Although the ground on which Pakistan has sought to structure its relations with the United States over the past six decades has continuously moved, it always included concerns about India.

Pakistan got close to America as a part of its effort to build its defences to protect itself from the threat it then perceived was posed by India. That was essentially the reason why Ayub Khan, first as defence minister and later as the country’s president, negotiated a series of defence agreements with the US. Pakistan bound itself in arrangements that covered a wide geographic front, stretching from the Mediterranean to the Pacific. Good relations with Washington also brought economic help to the country at the time Pakistan was attempting to speed up the rate of economic growth. That was a by-product, not the real motivation behind the effort to get close to Washington.

Later, during the presidency of General Ziaul Haq, while economic assistance from the US became the main motive for association with Washington, concern with India remained at the back of the policymakers’ mind. Both economic considerations and the need to strengthen its defences against India were the reason why Zia famously turned down the offer of help by President Jimmy Carter in return for Islamabad’s assistance to throw the Soviet Union out of Afghanistan. He famously called the American offer “peanuts”. Islamabad wanted more from the US than Carter’s America was prepared to give. Carter’s defeat in the elections of 1979 brought Ronald Reagan to power in Washington. The new head of the American state was prepared to do much more than his predecessor to destroy what he called the “evil empire”, the Soviet Union. Pakistan’s willingness to align itself with America to achieve this objective was welcome news in Washington. In return for Islamabad’s support to expel the Soviet Union from Afghanistan, America was prepared to provide copious amount of military and economic help.

By becoming a member of the American alliances in the 1950s and the 1960s, Pakistan was making a hypothetical commitment. It would support the US in any activity directed to stop the advance of communism in Asia and the Middle East. However, in the 1980s, association with the US meant providing active support in a military campaign — the one fought by the US in Afghanistan with the help of a number of proxies. This change produced a new dynamics in Pakistan’s situation. It shifted focus to Afghanistan in the making of policy and, at the same time, the country had to contend with many unanticipated consequences, being an active player in a battlefield close at hand. Among the latter were the rise of Islamic extremism in the country, weaponisation of Pakistani society and culture and ethnic conflict between some of the communities in the country. The large-scale migration of Afghans to Pakistan was to increase the Pashtun population in Karachi. The consequence of this particular development is still being felt in Pakistan’s largest city.

While the persisting concern with India was at the base of Pakistan’s Afghan policy, the entry of Afghanistan as a variable in the making of policy was to acquire increasing significance after the terrorist attacks on the US. Under General Pervez Musharraf and, after his departure, under the successor civilian government, curbing the rise of Islamic extremism and international terrorism associated with it became the basis of relations with the US.

However, with the easing of tensions with India, relations with the larger neighbour will become less of a factor in the crafting of foreign policy. A different kind of relationship with India would introduce a new variable in the way Pakistan looks at the world outside its borders. This will affect the country’s relations with the US as well.

Source: A New Paradigm

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

Accommodating a rising Asia

By Shahid Javed Burki
Published: November 14, 2011

There is a reason why it has been so difficult for the West and Japan to find a solution to their growing problems. This was not the case after the Second World War when the victors assembled in a small resort in the United States to craft a new world economic order, which came to be called the Bretton Woods system. Politics then was on the side of economics. It was not hard to argue and hence convince the voters that it would not pay to punish those who were defeated in the conflict. That was done after the First World War and the result was another global conflagration.

The first order of business at Bretton Woods was to rebuild Europe and since the United States was the only country with the resources to do that, it took the lead. John Maynard Keynes provided the intellectual underpinning of the ‘big idea’ developed at Bretton Woods. It was not hard for him to persuade those attending the conference that the disaster left by the about-to-be concluded war could only be dealt with by the states working together. That work had to be done in the fields of finance and development, and that would need new institutions. These were founded and became the International Monetary Fund and the World Bank.

The current crises in the global economy are different. They are the consequence of large changes in the make-up of the societies of the richer parts of the world. These changes have crept up slowly but coming together have produced a situation that can be resolved only by the articulation of a new ‘big idea’. This idea has to deal simultaneously with four developments: aging of the populations in Japan and the West, growing income inequalities in these countries that cannot be sustained in democratic societies, expectations that the state will provide security to those not in the work force and loss of confidence in the working of the state. That there are contradictions in some of these expectations can only be brought home to the voting population by leaders who are prepared to lead. Those don’t seem to be around at this time.

It may be a bit of a stretch to suggest that the future of the global economy could be driven by Asia. The continent may have some of the largest economies in the world but in terms of per capita income its citizens are about one-tenth as rich as the West and Japan. But the Asian continent is on the right side of the development equation. It has young populations, relatively strong states, large foreign exchange reserves and strong economic links with the world’s older economies. The last of these three is what gives Asia the leverage to author the big idea. It has become clear that no single country can provide the resources needed by Europe to save some of its parts from bankruptcy. Asia has the financial wherewithal to fund the facility the Europeans have put in place to aid the countries experiencing stress. The Cannes summit failed to provide the European Financial Stability Facility the financial resources it needed. Appeals were made to the BRIC leaders attending the summit to use their large surpluses to help EFSF but they demurred. It was right for them to show reluctance. They were being asked to either fund the EFSF directly or by expanding the resource base of the IMF. Doing the former would have made some economic sense since the returns on these resources would be much higher than those available from other relatively safe investments such as US treasury bonds. The latter would have made some political sense since the BRICs, in return for help, could have asked for a larger role in the running of the IMF. But that would have been incremental change.

The United States’ leadership has noted the rapid change in the structure of the global economy brought about by Asia’s rise. In an article titled “America’s Pacific Century” published in the November issue of Foreign Policy, the US secretary of state provided reasons why harnessing Asia’s growth and dynamism should be central to American economic strategic interests and a key priority for President Barack Obama. The article appeared on the eve of the American president’s third visit to Asia since coming into office. This visit took him to attend and the East Asia Summit in Bali, Indonesia as well as to the Asia Pacific Economic Cooperation summit in Hawaii.

The United States is working on bringing about an incremental change in the institutional structure of the global economy in order to accommodate rising Asia. What is needed, however, is a new institution in which the emerging world has a large voice, much more than seems possible in the Bretton Woods institutions. The older economies are reluctant to yield power to the emerging states. This was amply demonstrated when, following the resignation of Dominique Strauss Kahn, a French politician, the international community went looking for a new head of the IMF. It chose another French citizen, this time a woman who had served as finance minister in the government headed by President Nicolas Sarkozy, to replace Strauss Kahn even though there was expression of interest in the job by the citizens of some of the large emerging markets. The established order was not ready to pass on the baton.

Several emerging markets, in particular those in Asia, now have the financial clout to play a more meaningful and assertive role in the arena of international economics. They can also persuade the West to adopt some of the policies that would ease its economic difficulties. This is precisely what the West did when some of the important emerging economies were affected first by the Latin American debt crisis and later by the financial crisis in emerging Asia. In retrospect, it was a mistake to impose on these countries the role of the state which did more damage than good not only in the emerging world but later in rich countries as well. The shoe now is on the other foot.

Source: Accomodating a Rising 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

Reasonable politics, bad economics

By Shahid Javed Burki
Published: November 21, 2011

Pakistan once again stands at a crossroads as it struggles to strengthen the participatory system of democracy it reinstated in early 2008. It is also attempting to straighten the economy and ensure that it does not collapse altogether with its various pieces falling into a deep abyss. There is serious social discontent, particularly in the country’s urban areas — and within the urban areas, in the large cities —that could explode into street violence of the type seen in the Arab world over the last one year. Pakistan has lost nearly all respect among the members of the international community. That community itself is in a state of stress and is looking hard to find a way out. Pakistan, although now the world’s sixth largest country in terms of the size of its population, has not been invited to participate in the deliberations taking place to fashion a new global economic and political order. The country is isolated as never before in its more than six decades of history.

Which of the several roads should or could or would Pakistan take out of the crossroads? There has been much written recently on the country in foreign journals, magazines and newspapers to answer this question. Most of the writings suggest, either explicitly or implicitly, that the country is faced with a serious existential threat. A few serious books have also appeared that come to different conclusions about the country’s future. For instance, Anatol Lieven in his book, Pakistan: A Hard Country, decides that there are certain things about Pakistan’s society that would make it possible for it to survive even though the times are difficult. It is a hard country to understand but also a hard country to collapse and fall apart. Bruce O Riedel, once a close adviser of President Barack Obama and his administration on Pakistan and Afghan affairs, reaches the opposite conclusion in his book, Deadly Embrace: Pakistan, America and the Future of Global Jihad. Pakistan, he believes, wrongly I think, will not be able to carry the weight it currently bears and simply collapse from fatigue and lack of endurance. By collapse he means the destruction of the liberal political and economic order that will not be able to withstand the force of radical and extremist Islam. While Lieven who knows Pakistan well, having written on the country for many years for the Financial Times, and understands well the internal political and economic dynamics, Riedel’s knowledge of the country is considerably more superficial. As the title of his book suggests, his focus is on Pakistan’s stance towards what was once called America’s “war on terror”.

It would be right to round of this discussion with some of the recent writings on Pakistan by reference to Maleeha Lodhi’s compilation of the writings of a number of serious Pakistani scholars. The book with an important contribution by the editor, appeared under the title of Pakistan: “Beyond the Crisis”. As the title suggests, the county is in a state of crisis — a serious one as analysed by the various contributors to the volume — but the ‘beyond’ is more hopeful than indicated by Riedel and several other pessimists. The country will pull through by the adoption of intelligent policies by a wise leadership working within a participatory system of governance. The three key phrases in this formulation are the ‘system of governance’, ‘wise leadership’, and ‘intelligent policies’. These will be the three constructs on which I will base my analyses. Let me begin with the system of governance.

After more than six decades of experimentation, Pakistan seems to be settling down in politics. The earlier attraction for strongman rule is no longer there. There is now a consensus that competitive politics is the way to go. This means winning people’s support by exciting their interest in what elected politicians can do for them once they attain office. If there is a perception that those who have been voted into power are failing to deliver what they were expected to provide, they can be replaced when the time comes to go back to the polls. In between elections, a free media and free civil society can be expected to keep some check on the working of the political system. This is the way democracy is supposed to work and has begun to work in Pakistan.

But there is more to democracy than periodic elections and the watchful eye of the media and civil society. This was underscored by Fareed Zakaria some years ago in a powerful book about the needs of a true liberal democracy. It needs more than periodic free and fair elections. It requires rule of law, which ensures accountability on the part of those who occupy public positions. This can only be provided by a legal system that has a judiciary that can dispense justice without fear or favour. This condition is not fully met in Pakistan in spite of the hard-won independence by the upper echelons of the judicial system. The part of the legal system that comes into contact with the ordinary citizen is still not delivering justice in Pakistan. The citizenry is not being well served by the lower levels of the legal system.

There is also much talk of corruption and lack of accountability at all levels of government. Imran Khan, in his well-attended public meeting in Lahore, had a great deal to say about corruption, knowing full well that that is what people wanted to hear. But how to translate the desire for clean governance into some kind of policy and institutional framework? India, across the border, is also struggling with these questions although its governance structure is more developed than that of Pakistan’s. In other words, while the system of governance in Pakistan now has the trappings of a dramatic structure, it is still underdeveloped. Much more needs to be done. Will the political leadership have the wisdom to move forward in the right direction? Take the right road out of the crossroads?

Source: Reasonable Politics, Bad Economics

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

Policy stance in a changing world

By Shahid Javed Burki
Monday, 07 Nov, 2011

THE European crisis was only partly and temporarily addressed on October 26 when the continent`s leaders agreed to raise additional resources to build a firewall around the economies that were heading towards financial collapse.

The markets around the globe reacted to the agreement with enthusiasm. In the United States, Dow Jones Industrials rose by 340 points, a 2.9 per cent increase, taking the index to beyond 12,000. There was a similar reaction by the markets in Europe.

But this initial enthusiasm quickly dissipated as the markets and analysts began to see that the agreement did not have enough substance in it. It was built on a series of promises that were not likely to be realised in the way the continent was politically structured. Greece seemed to be walking away from the agreement.

The agreement had neatly dealt with the issue of Greece`s sovereign debt. It was recognised that no amount of belt tightening will enable the country to meet its obligations. The banks holding Greece`s debt were persuaded to accept a `haircut` of 50 per cent, terms which are usually available to bondholders following default.

In other words, Greece was allowed to effectively default with-out calling it that. The second part of the agreement sought to recapitalise the banks, increasing the ratio of capital to assets. This will have implications for the banking industry since it will result in reducing its profit and raising interest rates.

There was understandable concern that the emergency fund, the European Financial Stability Facility, had used mirror and images in order to provide comfort to the market. An amount of $1.4 trillion was mentioned as the size of the resources the EFSF will be able to use to stop crises in individual countries from becoming systemic.

Because of German insistence, the facility`s initial size was capped at $600 billion of which a bit more than $250 billion was tied up in loans to troubled countries.

This left about $350 billion for future operations. However, by indicating that the EFSF will guaranteeupto20percentofthe bonds floated by members, the available amount was to be leveraged at a ratio of one to five.

There was a hope that some of the countries that had large foreign currency reserves will be prepared to invest in the facility.

Right after the agreement was signed, Klaus Regling, head of EFSF, went to Beijing to get China to make a significant contribution to his facility. An amount of $100 billion was talked about.

It was indicated that if capitalsurplus countries such as China, Brazil, India, Russia, South Korea and Singapore were to make significant contributions to bolster the resources of EFSF, it could spin off a subsidiary to be managed by the IME If this happens these emerging markets will havefinally found a role for themselves in international economic affairs.

It is suggestive that the same issue of the Financial Times (November 1) carried two stories, one about Pakistan`s troubled economic situation and the otherabout India`s increasing economic influence in the global market place.

In an interview with the newspaper, Hafeez Sheikh, Pakistan`s finance minister, announced the decision by his government to forfeit the remaining part of the$11.3 billion loan the country had negotiated in late 2008. An amount of $3.7 billion remained undisbursed from the negotiated amount.

The minister acknowledged that disagreements with the Fundover fiscal management led to the programme`s suspension at the end of 2010. He said the country walked away from the Fund since the Washington-based financial institutions `demands had become too tough and the government would instead press aheadwith a homegrown fiscal programme`.

Pakistan appeared to have settled for a much more modest economic goal. The minister argued that a resilient Pakistani economy growing at about 3.5 per cent thisyear did not need the IMF lending and that government had resources of its own to take care of its obligations. These include payments to the IMF that would begin in early 2012 with a transfer of $1.2 billion to the institution to service the amount it has already received.

The minister confirmed that his government was approaching China for economic assistance.

Although not mentioned by Mr Sheikh, it is known that Pakistan is about to sign a $4.5 billion swap agreement with Beijing that will run for three years and make it possible for the country to service its large trade imbalance with its large neighbour without paying out in dollars.

While Pakistan was settling for a rate of growth less than one-half that of neighbouring India`s, New Delhi was increasing its economic clout in international economic affairs. It has already given large grants and credits to Afghanistan and Bangladesh, was planning to provide assistance to some of the resource-rich countries of Africa, and had established its own aidgiving agency. It was now seriously considering providing capital to augment the resources needed by Europe to address the continent`s mounting economic problems.

In an interview with the Financial Times, Monetk Ahluwalia, deputy chairman of India`s Planning Commission, laid out the conditions for Indian sup-port. He said that India along with other BRICS countries in return for helping Europe will demand a larger voice in international economic affairs, in partieular in determining how the IMF operates.

`The principal agency that is responsible for bringing about international stability is the IMF, he said. `We would certainly support the IMF in providing resource support to Europe. It seems to me that the IMF should be strengthened but be evenhanded.` The Fund, he said, should apply the same rules to both rich and poor countries. In a way the Indian official was making the same point made by the Pakistani minister. But there was a difference. The Pakistani was speaking as a supplicant; the Indian as a potential global economic master.

The divergent paths on which India and Pakistan are proceeding means that Islamabad has no problem in being sidelined in international economic affairs while India continues to carve out a prominent role for itself.

Accepting that India is now in a different economic league compared to Pakistan should not be a problem but this recognition should come with a change in policy stance. Among the changes needed is the willingness to trade more with India and also to accept investment by that country in particular its private sector in the Pakistani economy.

Policy stance in a changing world | ePaper | DAWN.COM

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G20`s failure at Cannes

By Shahid Javed Burki
Monday, 14 Nov, 2011

THE world now stands at a crossroads. The future looks grim. It is also in search of leadership and a new economic theory. In 2012, the American economy is set to grow at only 1.8 per cent while the Eurozone made up of 17 countries that have a common currency will see its economy increase by 0.3 per cent.

The problems the global economy faces are clear: slow pace of recovery, high rates of unemployment in most large industrial countries, large trade imbalances that have created equally large savings imbalances, and inflationary pressures in several large emerging economies. Some of these problems are linked; a problem in one part of the world contributes to the creation of a different problem in another.

There is also the need to develop a new theory of economic management during periods of stress. Such a theory was authored by the British economist John Maynard Keynes to guide the governments during the period of the Great Depression. His thinking helped to develop the Bretton Woods system of global economic management. It also assigned a major role to the state, particularly during periods of economic stress.

The modern world has no Keynes at this time with an authoritative voice. There is also a growing concern that the era of multilateralism inaugurated by the founding of the Bretton Woods system in 1944 is giving way to a new wave of nationalism.

According to one interpretation, `Thomas Hobbes is now prevailing over Immanuel Kant in the reordering of the global system`. But there is a paradox in this move. `Governments have cededpower to mobile financial capital, to cross border supply chains, and to rapid shifts in comparative advantage.

Control of information now belongs to 24-hour satellite television, and the cacophony that is the web.

The consequence is the crisis of politics. Citizens expect national politicians to protect them against the insecurities economic, social and physical that come with global integration. Yet governments have lost much of the capacity to meet the demand.` Of particular concern for the management of the world economy is the role that should be assigned to the state in various partsof the world, in particular in the West.

There cannot be sustained globalisation without truly multilateral institutions to guide it. But this is proving hard to do.

There was a brief period of hope that the various `Gs` the G7 group of rich nations; the G8 that added Russia to the G7 group of the world`s largest economies; the G20 group of the world`s largest economies, including several from the emerging parts of the world could be trusted to guide the governments around the globe to walk in step. In April 2009, the G20, meeting in London, was able to craft a response to pull out the global economy from the deepdownturn from which it was suffering because of the working of the financial sector.

The group then agreed on a massive government spending plan that briefly had China, Europe, the United States and others pulling in the same direction. In the words of Barack Obama, `because of the coordinated action the G20 took then, the global economy began to grow again. Emerging economies rebounded. In the United States, we`ve had 19 straight months of private sector job growth and added more than 2.5 million private sector jobs`. But he emphasised that much remained to bedone and that needed international cooperation.

`The G20 nations must deepen cooperation on the range of global challenges that affect our shared prosperity...When we met in London two years ago, we knew that putting the global economy on the path to recovery would be neither easy nor quick. But together, we forged a response that pulled the global economy back from the brink of catastrophe. That`s the leadership we`ve demonstrated before. That`s the leadership we need now to sustain economic recovery and put people back to work, in our own countries and around the world.` But that leadership was missing at Cannes, France where the G20 leaders met once again for their semi-annual summit.

According to Moises Naim of the Carnegie Endowment for International Peace, a Washington think-tank, the stimulus agreement reached in London `provided the very strong sense that indeed it was the committee that ran the world.

After that every single meeting has been less impactful than the prior one.` Some governments decided not to wait for collective action to materialise. The Swiss, for instance, decided to place a limit beyond which their highly sought after currency would not be allowed to go. On the eve of the G20 meeting in Cannes, the Japanese intervened massively to keep in check the persistent rise in the value of their currency. With these unilateral actions in place it became difficult to put pressure on China to let its currency rise in value and thus help address the problem of global imbalances.

According to one analyst, `as they arrived in Cannes, the leaders of the countries representing 8s per cent of global output found the agenda dominated by political turmoil in Greece and a Euro-zone crisis too hot for the G20 to handle. It produced an action plan for growth and jobs that committed countries to almost nothing they were not al-ready pursuing; and left the international monetary system almost unchanged` They had little success in making progress on their medium-term goals` The Cannes G20 summit ended on October 28 after issuing a communiqué that had more negatives than positives about the role the group was willing to play in addressing the problems faced by the global economy. The document recognised that the Doha round of trade negotiations was not likely to succeed in meeting its development objectives.

There was no agreement on funding the European Financial Stability Facility either directly or through the IMF The conferees did what is normally done when a consensus cannot be reached. They postponed action to a later date to the meeting of the finance ministers scheduled for February 2012.

According to one newspaper account, `putting a brave face on the lack of agreement, a grim-faced Nicholas Sarkozy, French president, said the communiqué mentioned increased funds for the IMF`s special drawing rights. The latter, Mr Sarkozy added, was likely to be the option adopted in February probably.

While all the G20 agreed that `exchange rate regimes that are currently relatively inflexible will be made more flexible, more swiftly, including China` Beijing did not commit itself to any fundamental change. The Chinese, instead, repeated their demand for better management of fiscal affairs by the economically more advanced countries in America and Europe.

Some nations with sound public finances Australia, Brazil, Canada, China, Germany, Indonesia, and South Korea committed to `additional measures to support demand if the economic situation worsens`. This was tepid response to a difficult situation that called for resolute actions.

There were many promises at Cannes but meagre results.

G20`s failure at Cannes | ePaper | DAWN.COM

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In a state of flux

By Shahid Javed Burki
Published: November 28, 2011

It would not be an exaggeration to say that Pakistan’s political situation is in a state of flux. There is low viscosity fluidity. The tide that is building up can go in many different directions. While natural tides are not subject to human control, the political one that is gaining strength in Pakistan can be managed by political forces. As politicians and the groups they lead get ready to bring about change, they are working to raise passions among the populace by using populist slogans. They have understood that phrases such as persistent poverty and corrosive corruption have emotive values. They use them to excite the masses they hope to lead. However, they have said little as to how they will address these problems once the masses have placed them in power.

There are precedents in Pakistan’s turbulent political history of the use of populism as an easy way to power. It was done by Sheikh Mujibur Rahman in the late 1960s by using the ‘six point programme’ to gain autonomy for East Pakistan. The momentum he built-up led to a brutal civil war and the eventual break-up of Pakistan. It was used by Zulfikar Ali Bhutto to build popular support for him and his new political grouping, the Pakistan People’s Party. Bhutto’s ‘roti, kapra, makan’ was a powerful slogan that mobilised the masses and brought him to power in what was left of Pakistan after the emergence of East Pakistan as the independent state of Bangladesh.

The important lesson to be learnt from these two incidents of the use of populism to gain power is that the results can be destructive unless the slogans used are accompanied by solid programmes. Both Mujibur Rahman and Bhutto came to power without understanding how they would deliver what they had promised. Both created chaos; political in the case of Rahman, economic in the case of Bhutto. Both paid with their lives for the mistakes they made.

There are some important differences between the Rahman-Bhutto eras and the one politicians face today. Thanks to the extraordinary increase in the flow of information and the availability of means to access it, people are much better informed about their relative situations than they were four decades ago. As political scientists such as Samuel Huntington and political-economists such as Albert Hirschman wrote in the late 1960s, perception of relative deprivation is a powerful political motivator. It can lead to extreme political instability, sometimes even to revolution, if institutional means for dealing with it are not found by those who are in positions of power.

The other important difference is that the various means of social-networking can be used and, have been used by those who feel deprived, to get organised to challenge the established order. This was done not only by those who brought the Arab Spring and with it regime change in several countries in the Middle East but it also helped organise the upheaval in London this summer against the policies of the ruling Conservative Party. It is also what has made the on-going Occupy Wall Street movement in the United States a powerful expression of discontent. Technology, therefore, has increased the attention span of the citizenry but reduced their tolerance. If they perceive that their situation with respect to the others is not to their satisfaction, they will react, sometimes even with violence.

Relative deprivation can be with respect to the other, more fortunate people in the same society. It can also be with respect to people in other parts of the world. Pakistan’s politicians have to grasp the important fact that the citizenry is not only deeply concerned about the growing inequality in their own country, as well as but also the ground their country is losing to other nations around the globe.

Perception about deprivation has several other dimensions. It is not only income and wealth inequalities that become the subject of great concern with people. Inequalities in opportunity also become the source of unhappiness. Readily available information tells people of the kinds of opportunities that are available to the more privileged ones who inhabit the same geographic space.

In recent days and weeks, we have been treated to reams of newspaper articles about how important it is for politicians to come up with ideas, preferably embedded in party manifestos, on how they will cure the society and the economy of the many ills from which they suffer. But the advice has not been taken. In the two well-attended meetings held by political parties currently in opposition to the Islamabad coalition, the leaders stuck to generalities. No indication was provided as to what precisely will be done when they attain power. To help them along, it may be useful to list some of the problems the country faces at this time. Let me list half a dozen of these, each needing a well-thought-out approach.

It is possible to identify a number of glaring failures of public policy over the last two to three years, especially since democracy returned to the country. Among them, the following six are particularly important. At the urging of the International Monetary Fund there was excessive concentration on attaining fiscal stability even at the expense of sacrificing growth. There was focus on personal rather than social gains. There was indifference towards defining long-term strategic priorities, which meant concentration on short-term problem-solving. There was almost total disregard of increases in personal and regional income inequalities. No attention was given to building institutions that are regarded as critical for obtaining sustainable economic and social development. And, there was no attention paid to the ground Pakistan was losing in terms of positioning itself in the rapidly changing global economic and political order.

If this is a reasonably accurate list of what ails the Pakistani economy at this critical time in the country’s history, then this is what politicians seeking power should be focusing on. A well-informed electorate will reward those who look at issues such as these in appealing for support. It is in the context of this kind of list of past failures that their performance will be judged, were they to attain power.

Source: In a State of Flux

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

Narratives for the next elections

By Shahid Javed Burki
Published: December 5, 2011

Several new development narratives should emerge as the date for the next general elections draws near. One would hope that out of these different lines of thinking at least two distinct programmes programs — perhaps even more — will surface for addressing current economic woes. These would offer distinct choices to the people as they go to the polls. People should know not just who they will be voting for but also what they will be voting for.

I happen to believe that the nature of politics is changing in Pakistan. In a recent book, Anatol Lieven described Pakistan as a hard country – hard to understand, but also hard to put down as a failure. He argues that while the Pakistani state is weak and is becoming weaker by the day, its society is strong. What lends strength to the society is people’s allegiance to small groups and communities. That makes it possible for the society to work; the leaders of these groups work with another. They thus produce a pyramidal structure that has a great deal of strength. This is what is meant by baradari politics. But that is set to change. Change will come as people gather more information about what is happening around them and what they are losing by having a weak state.

In the forthcoming elections, a larger proportion of people are likely to depart from caste and baradari interests and vote on the basis of what they consider to be good for the larger society. By weakening the politics of baradari, they may be able to strengthen the Pakistani state. This will mean a major change in the structure of politics that has endured for centuries. But for this change to proceed, the people must have confidence that as the larger state displaces the smaller communities and baradris, their own interests will be well served. For that to happen they must know what is being promised by the politicians who are seeking power.

However, a good part of the rhetoric emanating for politicians is focused on foreign relations, in particular relations with the United States. While this is an important matter and will have consequences for the country’s future, the discourse of economics is where attention needs to be given. To help the development of this discourse, it would be useful to pose some questions to those politicians who are trying to gain the attention of the country’s citizens, by appealing to them on the basis of issues rather than on cementing community and baradari ties.

Scanning what the politicians are saying these days about economics, it is surprising that the question of reviving growth in Pakistan’s faltering economy has not yet entered public discourse. Those who are currently active on the political stage should know that the most serious problem the country’s economy faces today, is that it continues to move forward at a tepid base. For the three-year-period between 2008 and 2011, the rate of GDP growth is likely to average only three per cent a year. With the population still growing at an explosive rate of two per cent per annum, income per head of the population is increasing by a paltry one per cent. With this low rate of economic expansion we can expect that a number of difficult economic, social and political problems will surface.

Those working hard to take away political power from those who currently wield it should be focusing their attention on the question of growth. They need to ask a number of questions. Why growth remains poor, why the economy’s slow expansion is mostly the consequence of public policy, and why the problem of sluggish growth, will create even more problems in the future? Having raised these issues they should then clearly indicate what they will do to revive growth.

Those who are in power now and have been responsible for making public economic policy will have a lot of explaining to do. Why is it that Pakistan today is South Asia’s sick man, growing at a rate less than half of that of Bangladesh and a quarter of that of India. They will undoubtedly attempt to place a great deal of blame on the poor security situation in the country and argue that the uncertainty that is created affects both domestic and foreign investment. They will also put emphasis on the destruction caused by recurrent natural disasters — two devastating floods in two successive years that have taken a heavy toll on the economy, in particular on the sector of agriculture. They will also blame the uncertainty created by the continuing turmoil in the global economy and its adverse impact on the domestic economy.

In other words, the focus of the people in power will be on the factors over which they had little control, while those on the other side of the political divide will blame the policymakers in place today for much that has gone wrong. In this ongoing debate, the truth lies nearer the position taken by those who blame policy for the disaster in economics. The external environment and natural disasters played a role but nowhere as much as was done by poor governance.

With the focus shifting to economics, the first issue that has to be taken in hand is that of the revival of growth. Here it should be emphasised that the traditional model that focuses on capital accumulation with most of the needed capital coming from abroad, will not work. The model Pakistan needs to adopt must include a number of other things — development of new institutions and strengthening of those that continue to function. Whichever leader, supported by whichever group, takes command, will have to take many decisions to orient the economy in a different direction. The leader will have to decide which economic classes should be placed in the lead of which sectors of the economy, in which sectors of the economy should the state work with the private sector and how much emphasis should be given to the development of some of the newer sectors. These are important questions; I will touch upon them in this space in the next few weeks.

Source: Narratives for the Next Elections

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

Putting growth on top of the agenda

By Shahid Javed Burki
Published: December 12, 2011

A developing country without robust economic growth cannot know social peace and political tranquillity. This is especially so, if the country also has a high rate of population increase. This is certainly the case with Pakistan. Currently, the rate of GDP increase is stuck in the three to 3.5 per cent range, while the country’s population is still increasing at a rate of close to two per cent a year. This means that the income per head of the population is growing at a rate of no more than 1.5 per cent per annum. The rate of increase could be as low as one per cent a year. Since the distribution of income is becoming increasingly unequal, much of the growth in national income is being captured by the rich and the very rich. The poor and the not-so-poor are left with very little. There cannot be any doubt that the number of people living in absolute poverty is increasing at a rate higher than the rate of increase in population. Therefore the proportion of the poor in the population is increasing — perhaps increasing very rapidly. Pakistan is creating conditions that could produce political and social upheaval in the not-too -distant future.

The only way to address this problem is to move the economy forward at a rate much higher than the one at the present. This could be done but, it will need serious reflection on the part of policymakers and hard work by people in power. It would not be too ambitious to aim at a rate of growth twice the present rate — to set the goal at 6.5 to 7 per cent a year. This leads me to ask two obvious questions. Is such acceleration possible? If it is possible, how soon can this target be reached? I will take up the second question first.

My own six-year experience with Latin America at the World Bank, from late 1993 to late 1999, left me with some understanding about how fast economies that had faltered can recover. This can happen once policies are set right and once the right kind of people begin to walk the corridors of power. I saw the economies of Argentina, Brazil and Mexico recover rapidly when the policymakers began to pursue the right set of objectives with the right sets of policies. In all three cases, the command of the economy was taken over by new groups who could quickly reorient their economies. In other words, sluggish economies can bounce back reasonably quickly.

There is another example close to home of a sluggish economic bounce back. Beginning in 1991, India completely altered the model of economic management. It gave up the ‘license raj’ that had put the state on the commanding heights of the economy. Instead, the private sector was allowed almost all the room it needed to take hold of the economy. The result was electric. Within a few years, the rate of increase in India’s GDP almost tripled. This rate of increase had begun to be called the Hindu rate of growth. Pakistan, too, can achieve the same kind of bounce-back over the same kind of period — three to five years. What are the policies that need to be put in place to get Pakistan’s economy to pick up speed? The list is a long one and cannot be covered in one newspaper article. I will take up just one issue today: rampant corruption.

To begin with, Islamabad needs to provide good governance and encourage the provinces to do the same. The government has failed, or is failing in almost all the areas that should be its responsibility. Much of the talk about governance is cantered on corruption. Eradication of this social and economic disease has begun to appear prominently in the agenda of at least one political party — Pakistan Tehreek-e-Insaf — and promises are being made by its leader that, if he and his associates gain power, they will go after corruption and those who have indulged in it with vengeance. Imran Khan, the party’s founder and its inspiration, has set the stage by declaring the value and location of his assets. He has claimed that he can account for all that he has spent on creating his asset base and unlike some other leaders, he does not hold assets outside the country. This is a good beginning. It places the responsibility squarely and fairly on the shoulders of those who aspire to lead the country.

But corruption is a complex phenomenon. It cannot be totally eradicated. It exits even in developed and rich societies — the societies that have highly developed institutions of governance. What needs to be addressed are those aspects of it that hinder economic growth and development and place a great deal of burden on the poor.

Corruption is present in all societies, old and new, developed and developing. It is present, for instance, in the United States. A few days ago, Rod Blagojevich, the ousted governor of Illinois, was sentenced to 14 years in prison. Among his 18 convictions is the charge that he tried to leverage his power to appoint someone to Barack Obama’s vacated Senate seat in exchange for campaign cash or a high paying job. India, next door, is politically more developed than Pakistan. It, too, is tackling the problem of rampant corruption that has involved people serving in the lowest rung of the administrative structure to those who occupy high positions. Some of the amounts involved in corrupt practices in India are staggering. In one deal pertaining to the award of licenses for cellular telephones, a minister cost the country some $40 billion of lost revenue. The minister has landed in jail.

These two examples — one from a developed and the other from an emerging economy — show that an important part of dealing with corruption is to create institutions of accountability. Pakistan has tried to do that but with little success. Some of the institutions created in the past themselves became arenas of corruption and political exploitation. People in high places have been charged but have escaped punishment. How should the institutions which need to be set up for ensuring accountability themselves become accountable?

Source: Putting Growth on Top of the Agenda

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

Black swans` in an interconnected world

By Shahid Javed Burki
Monday, 12 Dec, 2011

IN a global economy, effects of crisis in one part of the globe get quickly transmitted to the other parts. The world is now interconnected in ways never seen before.

Some of it happens because of the development of modern communication technologies.

News travels fast; those with access to mobile phones and tablets remain connected with other parts of the world.This is why the youth most likely to use these technologies and the instruments based on them have become so restless.

This was seen in the rapid spread of what came to be called the Arab Spring that has already resulted in the demise of several long-enduring regimes while threatening many more.

This, however, is not the only reason for the interconnectedness of the global society and economy. Over the last couple of decades the system of industrial production has been profoundly altered.

Most finished products meant for both domestic and international markets are now made from dozens, if not hundreds, of components made in many other parts of the world.

Apple`s iconic I Pad is one example ofa product that is made this way. It was designed by Apple in the United States but is made in one of the world`s largest factories in south of China. That factory brings in parts from several countries most of which are in East Asia. Cars and computers are also manufactured in this way. Boeings newest plane the Dreamliner or 787 is assembled in the United States but from the parts made in Europe, Japan, and China.

The development of this production system has created long supply chains that can be disrupted by unforeseen developments in some part of the world.

This happened when an earthquake produced a tsunami in Japan and caused major problems in the United States.

These problems slowed down the rate of economic growth in the US.

Major floods in Thailand this summer caused a significant fall in the production of lap tops and desk computers in many production centres all around the world. The Thai floods even affected Pakistan. One of Pakistan`s largest IT firms, the Lahore-based Netsol, has a large centre located in Bangkok that caters to the demands of a number of customers in East Asia. Disruptions caused by the floods resulted in a decline in Netsol`s operations.

These connections in the industrial production system mean that interna-tional trade has to be free of obstacles that countries used to erect to protect their domestic manufactures. Over the last several decades, the flow of international trade has become relatively free.

Countries around the globe have brought down significantly tariffs on imported goods. They have also dismantled other barriers to trade such as quotas on imports and providing large subsidies to domestic manufacturers. That notwithstanding, the sector of agriculture in most rich countries continues to enjoy some protection from imports from developing countries. The removal of this favoured treatment was one of the objectives of the now-stalled Doha round of trade negotiations.

That said changes in public policies around the globe and development of many global institutions have meant easier flow of trade among the nations around the globe. Trade now flows substantially unhindered among nations, as required by WTO.

Trade is not the only defining part of the process of globalisation that has gathered pace in the last couple of decades. Capital now flows almost freely among different economies, developed and emerging. Billions of dollars move across national frontiers at the flick of a computer`s switch.

Opportunities for making large profitsarise and are made use of by operators around the globe. With the development of new financial centres around the globe, the world of finance never sleeps.

It is open 24-hours a day, seven days a week, 12-months a year.A slight change in the environment even in countries that are less well connected with the global system can result in the flow in and flow out of large sums of money. For instance, the news that President Asif Ali Zardari had possibly suffered a heart attack and was flown out of Islamabad to Dubai caused capital to flow out the Karachi stock market.There is now even freer movement of people across national boundaries than was the case some decades ago. Even the anti-immigration sentiment in Europe and the United States has not kept out those who are determined to enter rich countries in search of better economic opportunities.

No amounts of barriers to the movement of people have kept people out. Go to any frequented tourist stop along the Mediterranean in Europe, and you will come across people from such populous Asian countries as Pakistan and Bangladesh selling umbrellas and trinkets in make-shift stalls that can be quickly removed when law enforcement officials arrive. Most of these peddlers have entered illegally.

There are therefore opportunities and risks for emerging markets in this growing interconnectedness. As already indicated shocks can get quickly transmitted and have to be absorbed by the countries that have only weak institutions to deal with them. Capital can move in and out, production systems can be disrupted, terms of trade can change quickly, various types of regulatory systems can affect the flow of trade. In the past Pakistan has had to deal with all such vicissitudes.

Violence in Karachi and security problems have discouraged foreign investorsand caused them to pull out millions of dollars from the Karachi stock market.

A sharp increase in the prices of agricultural commodities and oil in 2007-08 drained billions of dollars from Pakistan`s foreign exchange reserves.

Suspicions about the quality of shrimps exported from Karachi, led to a sharp decline in their export to Western Europe.

Concerns about the use of child labour in the shops manufacturing sports goods resulted in a serious loss of markets for this important item of export.

These are some of the problems created for vulnerable countries such as Pakistan. They are in addition to those brought by such natural disasters as floods and earthquakes. Planners and economic policymakers in Pakistan, however, have given little attention to protecting the country from these unforeseen shocks.

As Nasim Taleb puts it in his bestselling book, the appearance of `black swans` in human history have resulted in greater change than by those events whose occurrence could be predicted with some certainty. Black swan moments can cause havoc or produce opportunities. While their occurrence can be foretold which is why they are `black swans` any sensible economic management must factor them into its calculations.

`Black swans` in an interconnected world | ePaper | DAWN.COM

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