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  #271  
Old Thursday, March 01, 2012
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Asia-centric approach to development


By Shahid Javed Burki
Monday, 27 Feb, 2012


PAKISTAN`s policymakers, preoccupied as they have been with handling repeated economic crises, haven`t spent much time on thinking strategically about their country`s future.

When they do get around to doing that, it would be appropriate to look at Pakistan`s future in terms of the country being a part of `rising Asia.`That is important not only for Pakistan but other Asian countries as well.

However, even for those countries that think long and China is certainly one of them strategic considerations still focus on old ties. That is a mistake.

If the two recent visits by Xi Jinming, China`s president-to-be, can be seen as guide to rising Asia`s aspirations, it can be summed up as follows: to stay connected with the old world. The United States, visited by Xi in mid-March remains not only the world`s largest economy, it is also its most innovative.

Ireland, the tiny country in Europe`s northeast, offers an opportunity to enter the continent. Xi visited it after his tour of America.

He brought along 150 Chinese businessmen with him and invited Enda Kenny, the country`s prime minister, to Beijing. It appears that the fast rising and changing China wants to leave one thing unchanged: its connection with America and Europe.

This makes little sense if Asia`s prospects are viewed from a different perspective. Some Japanese economists some time ago came up with the notion that the flying geese offer a good way to describe how the prevailing order among nations changes with time. The pattern flying gees follow is known to all those who watch the sky as birds fly from one distant place to another. The bird in the lead can stay in place the lead for only a short time.

When it is in that position, it faces the most air pressure, in a way protecting those that are behind.

After a while, when it is overcome by fatigue, it just slips back, taking the last position while the bird right behind it goes in the lead. This was evolution`s way of teaching the flying birds how to cope with long-distance travel and air pressure.

This behaviour is only a slight fit for what happens to world economies. We have known for many decades that the country or countries in the lead eventually lose their position to those that are right behind. This happened to Britain after it had taken a big lead following the Industrial Revolution.

France caught up with it. Later Germany did the catching up with both Britain and France. Later still, the United States not only caught up with Western Europe but overtook it. Europe did not retreat to the back row but stayed right behind. There was much learning done in the catching up process.

Now the catching is being done by Asia, in particular the eastern part of the continent. But this latest episode of `catching up` has been messier than those that came before it and is likely to profoundly affect the working of the global economy.

The previous catch up periods were the result of technological advances. This is what happened to Britain because of the Industrial Revolution or to the United States because of the introduction of standardisation and mass production, first introduced by the automobile industry. Constant innovation became the main reason for the continuous dynamism of the American economy. Or the catching up happened because of the government of the day decided to play an aggressive role in reshaping the economy.

In France as well Germany, public policies helped domestic industries to move ahead and catch upwith those in the leading economies. The catching up, in other words, was the consequence of what happened to the economies in the second row. This time around, however, it is the first row economies that have begun to stumble. This is certainly the case in Europe and may also happen in the United States.

For most of Europe rapid decline is the consequence of important structural changes, not all of which have been fully understood by the continent`s policymakers. The most significant of these relates to the demographic structures of most European societies. They are experiencing rapid fertility declines that are tuning the population pyramids in these countries upside down.The proportion of old people has increased at the expense of those who are very young. This has several consequences. Two of these are particularly important.

With the share of the young in the population declining, it becomes increasingly difficult to run educational and entrepreneurial systems that retain the cutting edge. And the social system constructed over the last several decades that pay very well to the retirees cannot be sustained with fewer people in the working age and therefore fewer people paying taxes. The only long-term solution to the European problem is for the continent to admit more migrants and this is proving to be difficult because of the strong biases against cultural dilution.

But the Europeans have opted for what the economist Paul Krugman describes as `pain without gain` approach to address their crisis. Some European nations are suffering Great Depressionlevel pain: Greece and Ireland have had double-digit declines in output, Spain has 23 per cent unemployment, Britain`s slump has now gone on longer than its slump in the 1930s. `Worse yet, European leaders and quite a few influential players in America are still wedded to the economic disaster responsible for this disaster...Specifically, in the early 2010 austerity economics insistence that governments that should slash spending even in the face of unemployment became all the rage in European capital,` wrote Krugman recently in his New York Times column.

It appears, therefore, that there will not be an orderly rearrangement of the flying geese; that the European stepping back from the front line of the global economic structure is likely to be more painful and chaotic than need be the case. All the previous periods of catch up occurred when the world was not as well connected as is now the case. Any major adjustment and any major structural change reverberates around the globe. Pain in Europe is being felt in other parts of the world.

This is particularly the case in Asia and in Asia more in the continent`s eastern part than in other parts that has built up industrial structures based on the markets in the world`s more developed parts.

West`s economic decline is coming at a rate more rapid than was envisaged even by those who saw the 21st as Asia`s century. Asia should figure not only on the travel itineraries of aspiring Asian leaders but in the economic plans and thinking of all policymakers.

Asian countries should adopt Asia-centric approach to economic growth and development.

For Pakistan, placing Asia in the centre of strategic thinking means forging investment and trade links with the countries in the neighbourhood.

Once that is done, Pakistan will have to reorient its economic and industrial policies so that it takes advantage of the fast-paced changes in many parts of Asia, in particular the eastern part of the continent. Also, in developing future ties with Europe and America attention should be given to developing the industries that have growing demand in these older economies.

Asia-centric approach to development | ePaper | DAWN.COM
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  #272  
Old Monday, March 12, 2012
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Making the system inclusive


By Shahid Javed Burki
Published: March 12, 2012


Pakistan’s political evolution towards a sustainable democratic system has been slow but reasonably steady. Since democracy returned in 2008, two sets of Senate elections have been held. The second one resulted in shifting the control of the upper house to the coalition that currently governs at the center. This transfer of power occurred normally without causing a political earthquake. Unless something that is entirely unexpected happens in the next few months, the next general election will be held before the end of this year or early next year. With those elections an elected administration would have completed its full term in office. This would a milestone in the country’s political development — the first time in 65 years that an elected government was allowed to complete its tenure. This would be a giant step towards the realisation of a goal that seemed out of reach for several generations that have come and gone since Pakistan became an independent state. These developments lead to an important question: If Pakistan does settle down politically what would be the impact on the development of the economy?

An important recent book by James Robinson and Daron Acemoglu, two economists from Harvard University and the Massachusetts Institute of Technology respectively, suggests a close link between political and economic development. To argue that politics is an important determinant of economic change is relatively rare for economists. That is not so for political scientists who have been postulating such a link for decades. Samuel P. Huntington of the ‘clash of civilizations’ fame, pointed out in a work published more than 40 years ago that the association between political and economic change runs in both directions. His important finding based on a number of case studies that included Pakistan, was that rapid economic growth can be politically destabilising in the absence of institutions that can absorb the shocks and tensions that inevitably follow.

Viewing change from the perspective of economics, Robinson and Acemoglu reach a number of important conclusions. Two of these are important for understanding what is happening in Pakistan at this critical juncture in its history. Political progress is not inevitable, they maintain. The outcome is “never certain and even if in hindsight we see many historical events as inevitable, the path of history is contingent”. The same point is made by Francis Fukuyama in his recent book on the origins of political order. According to him history is littered with examples of political development being followed by political decay.

The lesson for Pakistan is obvious: people as well as institutions interested in seeing the political system evolve in the right direction need to remain vigilant lest slippage occurs. This has happened many times in Pakistan’s torrid political history. Four times the military’s intervention was accepted by the people — sometimes with considerable enthusiasm — since there were no viable alternatives available to address the problems the country faced at that time. Also, the military did not face any challenge to its move into the political arena. This is no longer the case. Now the citizens are confident that the country can be better managed by their representatives. If the representatives disappoint they can be removed through the electoral process. The citizens have also learnt to have their voices heard. This happened during the ‘black coats’ movements that helped to restore to their positions the judges fired by President Pervez Musharraf, an autocrat. Now, with the powerful precedence of the Arab Spring, the citizens feel even more equipped to raise their voices and be heard.

The second conclusion is even more powerful from Pakistan’s perspective. Robinson and Acemoglu argue that “countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people”. In that context the book differentiates between two different types of political institutions, each producing its own economic dynamics. There are ‘extractive political institutions’, which serve the interests of the few at the expense of the many. This is where most of Pakistan’s political parties are today. They cater to the interests of the few at the expense of the masses. This is the reason why the country is following economic policies that provide rich rewards to narrow interests — the political elite. One sign of healthy political development will be to have these extractive institutions become ‘inclusive’.

The defining characteristics of inclusive institutions in both the economic and political fields are the combination of centralisation, the rule of law, and pluralism. Power resting with a strong political entity at the center of the system would ensure that private interests can be checked. At the same time, the power of the central authority must be constrained by law and by instruments that ensure accountability.

These two types of institutional structures influence one another. Extractive political institutions produce extractive economic institutions. The influence can move in the other direction as well. The same holds for inclusive institutions. Inclusive institutions in politics will create inclusive economic institutions. It is right to suggest that at this point in time, Pakistan’s political and economic development is stuck at the extractive stage. One way of moving from the extractive to the inclusive stage is to dispense with the control of families over political parties. Dynastic politics provides party governance at the national as well as the regional levels. Democracy must be practiced not only for providing good governance, it must also be adopted by the parties that dominate the political landscape.

Source: Making the System Inclusive
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  #273  
Old Monday, March 12, 2012
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Self-perpetuating, extractive system


By Shahid Javed Burki
Monday, 12 March, 2012


THERE is now a nearconsensus among the economists who work in the area of development that political and economic progress interact with one another.

There cannot be movement in one without there being movement in the other. The most recent entry in this type of analysis is a book by two American economists, James Robinson and Daron Acemoglu.

Their book, `Why Nations Fail: The Origins of Power, Prosperity and Poverty` asks the following important question: Why are some societies democratic, prosperous and stable while others are autocratic, poor and unstable? They have a simple answer. Those that have been left behind usually have performed poorly in making political progress.

How should this finding be applied to the case of Pakistan? It is the case that Pakistan of recent years has moved in one right and one wrong direction. It has made some progress towards creating representative form of governance but has failed in moving forward its economy. Not only is the economy stagnating with the country growing at a rate one-half that of Bangladesh and one-third that of India. It has also seen a palpable increase in the incidence of poverty and as sharp deterioration inTHERE is now a nearconsensus among the economists who work in the area of development that political and economic progress interact with one another.

There cannot be movement in one without there being movement in the other. The most recent entry in this type of analysis is a book by two American economists, James Robinson and Daron Acemoglu.

Their book, `Why Nations Fail: The Origins of Power, Prosperity and Poverty` asks the following important question: Why are some societies democratic, prosperous and stable while others are autocratic, poor and unstable? They have a simple answer. Those that have been left behind usually have performed poorly in making political progress.

How should this finding be applied to the case of Pakistan? It is the case that Pakistan of recent years has moved in one right and one wrong direction. It has made some progress towards creating representative form of governance but has failed in moving forward its economy. Not only is the economy stagnating with the country growing at a rate one-half that of Bangladesh and one-third that of India. It has also seen a palpable increase in the incidence of poverty and as sharp deterioration inthe distribution of income and assets. In that context the country is moving against the trend in other developing nations. A report recently published by the World Bank reaches the surprising conclusion `that for the first time the proportion of people living in extreme poverty on less than $1.25 a day fell in every developing region from 2005 to 2008. And the biggest recession since the Great Depression seems not to have thrown that trend off course, preliminary data from 2010 indicate.

The progress is so drastic that the world has met the United Nation`s Millennium Development Goals to cut poverty in half five years before the 2015 deadline.` The world therefore has much to celebrate but Pakistan cannot join the celebration. It has bucked the trend.

Why? The answer comes from the Robinson-Acemoglu book.

They argue that only those political systems work to produce growth with poverty alleviation and improvement in the distribution of income that are `inclusive`.

Pakistan has developed what they describe as extractive systems.

They provide for the few not for the many.

In what way would an inclusive system work for Pakistani economy? It should aim to achieve at least the following three policy changes. Not only should there be a significant change in the government`s economic priorities,. some of the content of the policies need to be adopted should also change.

More imagination and politicalthe distribution of income and assets. In that context the country is moving against the trend in other developing nations. A report recently published by the World Bank reaches the surprising conclusion `that for the first time the proportion of people living in extreme poverty on less than $1.25 a day fell in every developing region from 2005 to 2008. And the biggest recession since the Great Depression seems not to have thrown that trend off course, preliminary data from 2010 indicate.

The progress is so drastic that the world has met the United Nation`s Millennium Development Goals to cut poverty in half five years before the 2015 deadline.` The world therefore has much to celebrate but Pakistan cannot join the celebration. It has bucked the trend.

Why? The answer comes from the Robinson-Acemoglu book.

They argue that only those political systems work to produce growth with poverty alleviation and improvement in the distribution of income that are `inclusive`.

Pakistan has developed what they describe as extractive systems.

They provide for the few not for the many.

In what way would an inclusive system work for Pakistani economy? It should aim to achieve at least the following three policy changes. Not only should there be a significant change in the government`s economic priorities,. some of the content of the policies need to be adopted should also change.

More imagination and politicalwill are needed than have been on display in recent years.

The first priority should be to improve the quality of governance by creating a system of accountability. A number of attempts have been made by several administrations in the past but did not serve the objective of holding elected officials and bureaucrats accountable to the citizenry. In fact, most of those attempts resulted in politicising the accountability structure.

In recent years the governments headed by Prime Ministers Nawaz Sharif and Benazir Bhutto and President Pervez Musharraf used the accountability apparatus that had been set up to settle political scores or to achieve political goals.

A new effort is needed. This should ensure full autonomy to an accountability system and thus prevent interference by the executive branch of the government.

One way of achieving this objective would be to appoint, say, a five-member accountability board (AB) to oversee the working of all branches of government-the executive, the legislature and the judiciary. AB should be appointed by the national legislature on the recommendations made by the executive branch. The chairman of the board as well as its members should serve terms longer than that of the legislature, perhaps eight years. Two members should be appointed every two years. The board should oversee the working of the investigative agency and the AB courts. It should prepare and present to the national assemblywill are needed than have been on display in recent years.

The first priority should be to improve the quality of governance by creating a system of accountability. A number of attempts have been made by several administrations in the past but did not serve the objective of holding elected officials and bureaucrats accountable to the citizenry. In fact, most of those attempts resulted in politicising the accountability structure.

In recent years the governments headed by Prime Ministers Nawaz Sharif and Benazir Bhutto and President Pervez Musharraf used the accountability apparatus that had been set up to settle political scores or to achieve political goals.

A new effort is needed. This should ensure full autonomy to an accountability system and thus prevent interference by the executive branch of the government.

One way of achieving this objective would be to appoint, say, a five-member accountability board (AB) to oversee the working of all branches of government-the executive, the legislature and the judiciary. AB should be appointed by the national legislature on the recommendations made by the executive branch. The chairman of the board as well as its members should serve terms longer than that of the legislature, perhaps eight years. Two members should be appointed every two years. The board should oversee the working of the investigative agency and the AB courts. It should prepare and present to the national assemblyevery year a report on the state of governance in the country.

The second area needing attention is the mobilisation of domestic resources for running the affairs of the government and for making public sector investments.

Without adequate public revenues, high rates of economic growth will not be possible.

Resource constraint is not a n new problem. It is also the one that various governments at various times in the country`s history have worked upon but without much success. The tax-to-GDP ratio has now declined to 8.5 per cent, the lowest of any large developing country economy.

A number of previous reform efforts were made with the help of outside development and finance institutions particularly the World Bank and the IME. The former advised the governments in office to develop and modernise the tax collection system including the working of the tax collection agency now called the Federal Board of Revenue. The latter made increasing the collection of government revenues as one of the conditions for providing much needed assistance.

The last IMF effort was made in 2008-11 but was abandoned after Islamabad indicated to the agency that the reforms it was pushing were politically not feasible. In fact, it was the absence of political will that resulted in the collapse of the Fund programme. However, it remains critical to improve the government resource situation.every year a report on the state of governance in the country.

The second area needing attention is the mobilisation of domestic resources for running the affairs of the government and for making public sector investments.

Without adequate public revenues, high rates of economic growth will not be possible.

Resource constraint is not a n new problem. It is also the one that various governments at various times in the country`s history have worked upon but without much success. The tax-to-GDP ratio has now declined to 8.5 per cent, the lowest of any large developing country economy.

A number of previous reform efforts were made with the help of outside development and finance institutions particularly the World Bank and the IME. The former advised the governments in office to develop and modernise the tax collection system including the working of the tax collection agency now called the Federal Board of Revenue. The latter made increasing the collection of government revenues as one of the conditions for providing much needed assistance.

The last IMF effort was made in 2008-11 but was abandoned after Islamabad indicated to the agency that the reforms it was pushing were politically not feasible. In fact, it was the absence of political will that resulted in the collapse of the Fund programme. However, it remains critical to improve the government resource situation.A programme aimed at this objective could have the following four elements: (a) reforming the tax collection system, possibly by contracting it out to a consortium of private management firms based on carefully worked out targets following a time-line; (b) expanding the tax base by bringing in the excluded sectors into the tax net, (c) eliminating exemptions, (d) prescribing targets for provincial tax mobilisation.

Possible targets could be increasing the ratio by 1.5 percentage points a year at the federal levelA programme aimed at this objective could have the following four elements: (a) reforming the tax collection system, possibly by contracting it out to a consortium of private management firms based on carefully worked out targets following a time-line; (b) expanding the tax base by bringing in the excluded sectors into the tax net, (c) eliminating exemptions, (d) prescribing targets for provincial tax mobilisation.

Possible targets could be increasing the ratio by 1.5 percentage points a year at the federal leveland 0.5 percentage points for the provinces.

It has not been recognised by policymakers that by not raising enough resources for the proper functioning of the government, the country loses the space within which it can operate without foreign interference. Continuing reliance on foreign flows results in some loss of sovereignty. That this would inevitably be the result is now fully apparent as Pakistan relations with the United States continue to deteriorate. Washington is now Pakistan`s largest donor andand 0.5 percentage points for the provinces.

It has not been recognised by policymakers that by not raising enough resources for the proper functioning of the government, the country loses the space within which it can operate without foreign interference. Continuing reliance on foreign flows results in some loss of sovereignty. That this would inevitably be the result is now fully apparent as Pakistan relations with the United States continue to deteriorate. Washington is now Pakistan`s largest donor andit wants in return what the country cannot politically deliver.

These US demands could have been met when the administration was in the hands of the military. A government that draws its power from the people is naturally constrained by their wishes.

The third area needing attention is that of the development of the country`s abundant human resource. This has been neglected in the past and continues to be given low priority by a socially exclusive political system. Pakistan`s educational and health systems now have the involvement of considerable private initiative. Privately owned and managed schools, colleges, universities, clinics and hospitals serve the well-to-do well.

The rest of the population is left to the poorly performing public sector institutions. Pakistan has one of the youngest populations in the world. The median age is only 21 years which means that some 90 million people are less than that age. If the country trains and educates them, enormous economic and social benefits could flow. If not, the youth will become a burden hard to carry.

For moving the country towards inclusive social systems rather than continue to function as extractive economic and political systems, the citizens must put pressure on those who govern to adopt the types of policies described above. Extractive systems become self-perpetuating. Only the people can move them in the right direction.it wants in return what the country cannot politically deliver.

These US demands could have been met when the administration was in the hands of the military. A government that draws its power from the people is naturally constrained by their wishes.

The third area needing attention is that of the development of the country`s abundant human resource. This has been neglected in the past and continues to be given low priority by a socially exclusive political system. Pakistan`s educational and health systems now have the involvement of considerable private initiative. Privately owned and managed schools, colleges, universities, clinics and hospitals serve the well-to-do well.

The rest of the population is left to the poorly performing public sector institutions. Pakistan has one of the youngest populations in the world. The median age is only 21 years which means that some 90 million people are less than that age. If the country trains and educates them, enormous economic and social benefits could flow. If not, the youth will become a burden hard to carry.

For moving the country towards inclusive social systems rather than continue to function as extractive economic and political systems, the citizens must put pressure on those who govern to adopt the types of policies described above. Extractive systems become self-perpetuating. Only the people can move them in the right direction.

Self-perpetuating, extractive system | ePaper | DAWN.COM
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Making decentralisation work


By Shahid Javed Burki
Monday, 19 March, 2012


HOW does Pakistan`s evolving federal system compare with those that have been around for a long time? While the system is in transition, will it deliver what the citizens want: good governance and economic growth that spread benefits broadly? These are important questions and some answers can be provided by looking at the experiences of other federal systems around the globe. The answers I will provide will not be comforting.

Compared to other federalist structures, four differences stand out. Pakistan is attempting to quickly achieve what took considerable period of time to develop in more successful systems.

The aim of developing federal systems is to bring government closer to the people. In Pakistan the process appears to have stopped at the provincial level.

Decentralisation has not reached the local level where it is needed the most.

It has not provided the fiscal space to the subnational governments so that they can raise their own resources and be responsible to the citizens as to how they are used. And, not much attention was given to creating a fully representative system for watching over how decentralisation proceeds.

The most important difference between the evolving federal structure in Pakistan and those inHOW does Pakistan`s evolving federal system compare with those that have been around for a long time? While the system is in transition, will it deliver what the citizens want: good governance and economic growth that spread benefits broadly? These are important questions and some answers can be provided by looking at the experiences of other federal systems around the globe. The answers I will provide will not be comforting.

Compared to other federalist structures, four differences stand out. Pakistan is attempting to quickly achieve what took considerable period of time to develop in more successful systems.

The aim of developing federal systems is to bring government closer to the people. In Pakistan the process appears to have stopped at the provincial level.

Decentralisation has not reached the local level where it is needed the most.

It has not provided the fiscal space to the subnational governments so that they can raise their own resources and be responsible to the citizens as to how they are used. And, not much attention was given to creating a fully representative system for watching over how decentralisation proceeds.

The most important difference between the evolving federal structure in Pakistan and those ina number of other democracies is that in the case of the former it was done quickly and by way of a change in the basic law of the land.

Most of the successful federal structures evolved gradually from the basic law or the constitution adopted by the federating system. Once the constitution was in place it guided the process of governance and the evolution of the federal system. And that was not done with the involvement of the local communities. This is certainly the case with the large federal systems spread around the globe.

This is not happening in Pakistan.

Take the American and Indian systems as two examples. In the case of the United States, there was a deep and involved debate among the founding fathers on the virtues of a federal system and the rights of the federating units within the system. The founding fathers, while keen to create a viable central authority, were equally anxious to protect the rights of the states they represented. A compromise was reached which allowed the states considerable autonomy while entrusting the federal authority a number of essential and vital functions.

The Indian system was born with a strong centre. In fact, the central government was called the union government rather than the federal government. The two systems evolved in very different directions. In the American system, largely because of the role played by the Supreme Court, the federal government acquired more power than was originally envisaged. Thea number of other democracies is that in the case of the former it was done quickly and by way of a change in the basic law of the land.

Most of the successful federal structures evolved gradually from the basic law or the constitution adopted by the federating system. Once the constitution was in place it guided the process of governance and the evolution of the federal system. And that was not done with the involvement of the local communities. This is certainly the case with the large federal systems spread around the globe.

This is not happening in Pakistan.

Take the American and Indian systems as two examples. In the case of the United States, there was a deep and involved debate among the founding fathers on the virtues of a federal system and the rights of the federating units within the system. The founding fathers, while keen to create a viable central authority, were equally anxious to protect the rights of the states they represented. A compromise was reached which allowed the states considerable autonomy while entrusting the federal authority a number of essential and vital functions.

The Indian system was born with a strong centre. In fact, the central government was called the union government rather than the federal government. The two systems evolved in very different directions. In the American system, largely because of the role played by the Supreme Court, the federal government acquired more power than was originally envisaged. Thecourt used the `commerce clause` in the constitution that called for free flow of goods and people across state boundaries and interpreted it broadly to increase the powers of the central authority.

In India, the states grew stronger at the expense of the union.

This happened because of the rise in power of the regional political parties. The regional parties are now politically more powerful than the two national organisations. That is still not the case in Pakistan.

The Constitution of 1973 in Pakistan was designed to create a federal system with the provinces allowed to exercise authority in a number of areas. This was considered to be a necessary condition for preserving what was left of Pakistan after the country`s eastern wing broke away and became the independent state of Bangladesh. However, the full extent of autonomy was not granted immediately. The process was to be completed following the development of competence and capacity in the federating units. That, of course, did not happen.

In other words, the Pakistani system did not evolve from practice; it was the outcome of a major change in the basic law the eighteenth amendment to the constitution. The pace adopted to bring about a major structural change was the result of the mistrust that existed between those who wield power in Islamabad and those who govern in the provinces.

Since the system did not evolve, it does not balance thecourt used the `commerce clause` in the constitution that called for free flow of goods and people across state boundaries and interpreted it broadly to increase the powers of the central authority.

In India, the states grew stronger at the expense of the union.

This happened because of the rise in power of the regional political parties. The regional parties are now politically more powerful than the two national organisations. That is still not the case in Pakistan.

The Constitution of 1973 in Pakistan was designed to create a federal system with the provinces allowed to exercise authority in a number of areas. This was considered to be a necessary condition for preserving what was left of Pakistan after the country`s eastern wing broke away and became the independent state of Bangladesh. However, the full extent of autonomy was not granted immediately. The process was to be completed following the development of competence and capacity in the federating units. That, of course, did not happen.

In other words, the Pakistani system did not evolve from practice; it was the outcome of a major change in the basic law the eighteenth amendment to the constitution. The pace adopted to bring about a major structural change was the result of the mistrust that existed between those who wield power in Islamabad and those who govern in the provinces.

Since the system did not evolve, it does not balance therights granted to the federating provinces and their capacity to handle new authority. This mismatch is posing a number of serious problems. There is the problem associated with the availability of finance to pay for new functions. It has been estimated that it will cost the provinces at least Rs200 crores to adequately carry out the new responsibilities assigned under the 18th Amendment. The additional resources that have been maderights granted to the federating provinces and their capacity to handle new authority. This mismatch is posing a number of serious problems. There is the problem associated with the availability of finance to pay for new functions. It has been estimated that it will cost the provinces at least Rs200 crores to adequately carry out the new responsibilities assigned under the 18th Amendment. The additional resources that have been madeavailable by the formula adopted by the Seventh National Finance Commission Award amount to only Rs35 crores, or about a sixth of the needed amount.

This gap should be met by the provinces raising their own resources. They will need both authority and competence to achieve this objective. At about 0.5 per cent of GDP, provincial own resource is very low. There are several reasons for this and they need to be addressed by creating appropriate in-centives for the local authorities.

At this time, provincial taxing capacity is low; provinces have a limited administrative capacity to manage their finances; the tax base has been reduced as a result of several exemptions and preferential treatment; and political considerations prevent pressure on property owners and other potential taxpayers to pay their dues to the government.

Decentralisation needs to go beyond the provincial level. Take the American system as an example. It comprises some 90,000 governments or 1,800 governments per state. The government, in other words, reaches down to the people.

And, with emphasis on electing rather than appointing officials responsible for providing services to the people, they are also accountable to them. Americans choose more than half a million elected officials and in many places they also get to vote directly on legislation through initiatives and referenda. This structure provides unparalleled openings for citizenship participation.

Another important problem with the way the process of decentralisation is being carried out in Pakistan is to give to the executive branch the responsibility for resolving disputes between the governments at different levels and for guiding further evolution of the system. In moving forward there has to be much greater involvement of local communities and that can only happen if they are able to have their voice heard.

As one commentator, writing onthe American experience, puts it, `creating constitutional rights without foundation frays the community fabric and, with it, the very notion that the majority can enact into law some expression of shared values that make ours a society whose whole is better than the sum of its parts. In pushing a constitutional vision of location in larger social settings, liberals risk weakening the communal values and institutions that best afford our most disadvantaged the chance of good life`.

There are two main conclusions to be drawn from this discussion.

Since the new federal structure was adopted in great hurry, there are a number of problems with its design.

Some of these will create enormous financial problems and constrain the ability of the central authority to manage the economy.

The other problem with the entire process of devolution is its topdown approach. Local communities were left out while the new system was being designed.

There was the assumption that since the designing was being done by the people`s elected representatives, the people`s rights will be protected and their aspirations fully realised. But in exercising authority policymakers are influenced by where they sit and not always by whom they represent.

Devolution was a centrally managed exercise and which means that local interests were not fully reflected. It is important to correct the course on which we are proceeding.the American experience, puts it, `creating constitutional rights without foundation frays the community fabric and, with it, the very notion that the majority can enact into law some expression of shared values that make ours a society whose whole is better than the sum of its parts. In pushing a constitutional vision of location in larger social settings, liberals risk weakening the communal values and institutions that best afford our most disadvantaged the chance of good life`.

There are two main conclusions to be drawn from this discussion.

Since the new federal structure was adopted in great hurry, there are a number of problems with its design.

Some of these will create enormous financial problems and constrain the ability of the central authority to manage the economy.

The other problem with the entire process of devolution is its topdown approach. Local communities were left out while the new system was being designed.

There was the assumption that since the designing was being done by the people`s elected representatives, the people`s rights will be protected and their aspirations fully realised. But in exercising authority policymakers are influenced by where they sit and not always by whom they represent.

Devolution was a centrally managed exercise and which means that local interests were not fully reflected. It is important to correct the course on which we are proceeding.

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Experimenting with growth models


By Shahid Javed Burki
Monday, 26 March, 2012


PAKISTAN`S poorly performing economy calls for a well thought out growth strategy. The Planning Commission has drafted one but it is unlikely that it will get to be implemented.

It calls for a major change in the way the economy needs to be managed and developed. Its aim is to realise a reasonably high and sustainable rate of growth by concentrating not on investment but on increasing the efficiency of the economy.

The proposedstrategyneeds the full backing of the political establishment which will be difficult to secure as the governing political coalition gets ready for the next general election. What a quick reading of history tells us is that Pakistan has been subjected to so many policy changes in the past that those who would have liked to invest in the economy are holding back.

Investors don`t appreciate uncertainty. From the perspective of economic management, Pakistan`s history divides fairly neatly into several periods. The first began almost 65 years ago when the country gained independence and lasted for a dozen years. Those who governed in the period from 1947 to 1958 were preoccupied with two problems.

The first was the way the Indian administration under the leadership of Jawaharlal Nehru looked at Pakistan as the latter triedstand on its own economic legs.

It appeared to those responsible for managing the Pakistani economy that India was determined to cripple it, perhaps in the hope that Muhammad Ali Jinnah, Pakistan`s founding father, would apply for readmission into the Indian union.

The second problem the first Pakistani administration needed to deal with was the settlement of eight million refugees who arrived from India. Thus preoccupied, the new administration had no time to deal with the question of economic growth. That was left to be dealt with at a later date.

Serious economic planning began under General Ayub Khan, the first military president. He placed the Planning Commission in his own office and appointed himself as the chairman. Saeed Hasan, a senior civil servant, was appointed the Commission`s deputy chairman.

The president also asked the United States for technical assistance for preparing the Second Five Year Plan. This came in the form of nearly a dozen economists from Harvard University who were deployed as advisors in the Planning Commission and in the then two provincial planning and development departments.

A plan was produced in 1960 to cover the 1960-65 five year period.

It had three important features: emphasis on growth, reliance on the private sector with only light guidance provided by the government, and significant augmentation of domestic savings by official development assistance (ODA).

The United States and theInternational Development Associations (IDA), a new affiliate of the World Bank, were the main sources of ODA.

The second plan was remarkably successful in accelerating the pace of economic growth. It more than doubled the increase in per capita income which reached an unprecedented level of three per cent a year. The third plan (196570) followed the same model and would have produced the same result had it not been interrupted by two developments. The first was the 17 days war with India in September 1965 just as the third plan period was beginning.

The second was Ayub Khan`s illness which weakened him physically and affected his resolve to bring about the country`s rapid development. He was forced out office in 1969 by General Yahya Khan, the commander-in-chief of the armed forces. The new president was himself thrown out of office after he had caused East Pakistan to separate and become the independent state of Bangladesh.

This change of administration happened in a coup in December 1971 staged by a group of young military officers. They brought Zulfikar Ali Bhutto, a civilian, to govern first as president and chief martial law administrator and later as prime minister.

Bhutto had a deep interest in economic matters but his approach was quite the opposite to the one that had produced the 1960s miracle. His model of economic management and change also had three elements: a majorrole for the state, state-led industrialisation, and tapping the rapidly increasing wealth of the Middle East for external finance. He achieved the first objective by nationalising the privately owned large industries, banks and insurance companies.

To achieve the second, he established a number of state-owned corporations. For the third he encouraged the migration of millions of construction workers to help the oil-rich countries build infrastructure. These policies jolted the economy from which it took a long time to recover. It was surprising that Bhutto an avowed socialist did not have any place in his scheme of governance for disciplined planning. The public sector projects implemented during the period were not subjected to the kind of analysis used during the period of Ayub Khan. Many reflected the whims and interests of the ruler and the ruling establishment.

The next economic period began in 1977 when Bhutto was removed from office and lasted for 11 years until the death of General Ziaul Haq, the country`s third military ruler. The new administration attempted to put the economy back on the track on which it was moving before the Bhutto interregnum. Powerful bureaucrats and a clutch of economists were back in power. Mahbubul Haq, the principal author of the Second and Third Plans, was brought back from the World Bank and placed in change first of the Planning Commission and then of the ministry of finance.

Growth returned to the econo-my but not because a well thought out strategy was put in place. It was largely the consequences of the large flow of external assistance provided by the United States in return for the effort Islamabad made to expel the armed forces of the Soviet Union from neighbouring Afghanistan.

Most of the structural changes made during the Bhutto period remained. Pakistan had to wait for the death of President Zia before the private sector once again be-gan to play the leading role in managing the economy.

Yet another distinct period in the country`s economic history saw the reversal of some of Bhutto`s policies. The financial sector was placed in private hands and `Washington Consensus` set of policles were adopted. These included the opening of the economy to the world outside. However, this fundamental change in the approach did not bring growth back to the economy.By that time a number of fault lines had opened up under the economic structure for the country and these were not removed since no administration stayed long enough to affect change. The country was politically unsettled. Seven administrations four elected and three appointed as caretakers governed during the eleven year period between Zia`s death and the fourth military intervention in October 1999.

Under President Pervez Musharraf the tried and tested model of economic management was put in place again. The three features of the Musharraf`s model were the provision of space in which the private sector could operate without much constrain by the state, centralisation of economic policy making with little provincial autonomy, and dependence on external finance to augment paltry domestic savings. As was to be expected, the economy rebounded largely because of the activation of the capacity that had been created during the earlier periods.

With the return of democracy in 2008, nine years after Musharraf`s rule, the political establishment was too preoccupied with managing the transition to civilian rule to pay much attention to economic management. This is where the situation stands today while the economy continues to slip without much guidance provided by the policymakers. Will the administration that takes office following the next general elections adopt a viable growth strategy? Only time will tell.

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The middle class debate


By Shahid Javed Burki
Published: April 2, 2012


There is a debate both inside and outside Pakistan about the size of the middle class in the country. I had suggested in an article written some time ago for Dawn that the size of the middle class was about 40 million. At that time the country’s population was about 170 million. If my estimate was correct, the Pakistani middle class accounted for a bit less than 24 per cent of the population. This did not seem to be an unreasonable estimate for a country at Pakistan’s stage of development. I had used a simple back-of-the-envelope type of calculation to reach my estimate, which used the World Bank’s income distribution numbers for Pakistan that provided the shares of income for the upper and lower deciles of population and for the quintiles in between.

Based on considerably more robust pieces of analyses carried out by several Indian scholars, it was determined that the Indian middle class accounted for some 40 per cent of that country’s population. This meant that some 500 million people in India could be said to belong to this economic and social class. While the Indian estimate generated considerable excitement among western businesses, my estimate for Pakistan provoked some controversy. At a conference held in Belagio, Italy, some participants from the US doubted my numbers, suggesting that it was a very high estimate. Why this questioning when a much larger one for India was readily accepted?

The answer is simple. There is a group of scholars in the US who believe that the endgame has been reached for Pakistan as we (and they) know the country today. They believe that Pakistan is now ripe for takeover by Islamic radicals. Once they have succeeded in overthrowing the current political and social order, they will go on to establish a regime not too different from the one that has been governing for the last several decades. Such a regime, like the one in Tehran, will be hostile towards the West, in particular towards the US. It will also be much more dangerous being in possession of a large nuclear arsenal — now believed to be the fourth largest in the world — a radical Islamic Pakistan would pose a serious threat to the US, and by implication, to the state of Israel. The West should, therefore, be prepared to take action to prevent such an unpleasant outcome. It was, however, not specified exactly what action should be taken.

The middle class estimate, such as the one I had offered, countered this line of thinking. It was recognised that the middle classes normally are more inclined towards modernity than other classes. In this context it is worth quoting from Francis Fukuyama’s recent article in Foreign Affairs. He writes: “It is most broadly accepted in countries that have reached a level of material prosperity sufficient to allow a majority of their citizens to think of themselves as middle-class, which is why there tends to be a correlation between high levels of development and stable democracy”. He accepts the fact that there can be deviations from this path, as has been the case in Iran and Saudi Arabia, but that is explained by their enormous oil wealth which they can use to obtain the loyalty of the middle class. The Arab Spring has shown — he maintains — that the middle class can be mobilised against any kind of dictatorship including the theocratic ones to which the followers of radical Islam aspire. What stands in the way of the nightmare seen in Pakistan by some American scholars is the middle class. If it is large enough, their fear is unfounded and no action is needed. The academics advocating that the West should be prepared, don’t like this conclusion to be reached since it is likely to breed complacency amongst policymakers.

More serious work has been done on the size of the middle class in Pakistan since I wrote my article. In a recent contribution by the economist Sakib Sherani to Dawn titled “Consumption conundrum” (March 23), he presents a much higher estimate than I had provided, both in terms of the size of the middle class in Pakistan and its proportion in the total population. “I updated the figure arrived at earlier, making one crucial adjustment: for the estimated size of Pakistan’s undocumented (or ‘black’ economy). The adjusted figure for the middle class is a staggering 70 million people, or 40 per cent of the population”, he writes. This brings the Pakistani situation closer to the one that is generally accepted for India.

A large Pakistani middle class will keep Pakistan moving on a relatively liberal path in terms of its economic and political development. This class is also influenced by the members of the large Pakistani and Muslim diasporas, particularly in the US. The Pakistani middle class is well-represented in the various diasporas dispersed across the globe. Notwithstanding the European and American fears about the penetration of radical Islam into these communities, large segments of these populations have picked up the liberal economic, political and social values of their host populations. This makes the diasporas more modern and secular than the native populations from which they are drawn. With the development of communication technologies in recent years, the Muslim communities in the West are not only in touch with their homelands, they are also influencing the populations from which they come from.

We know from the several case studies that have been carried out to understand the dynamics of the Arab Spring, that the diasporas had a deep influence on the events leading up to the uprisings in the streets and the public squares. Prominent members of the diasporas are now prominently engaged in the political restructuring of countries such as Egypt, Libya, and Tunisia. In Pakistan, Imran Khan’s rise has the support and financial backing of the Pakistani diasporas in Britain, the Middle East and North America. I think it is safe to assume that Pakistan’s development will be deeply influenced by its middle class, which is not likely to adopt the radicalism on offer by various groups such as al Qaeda and the Taliban.
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Non-traditional trade opportunities in India


By Shahid Javed Burki
Monday, 02 April, 2012


ALTHOUGH the pace has been slow, Pakistan and India are making progress in moving towards normal trade relations.

This was recognised by the comments made by Dr Manmohan Singh, the Indian prime minister, after his meeting in Seoul, Korea with his Pakistani counterpart.

He was appreciative of the fact that Pakistan had moved from using a positive list to regulate trade with its neighbour to a negative list. As trade economists have long argued, positive lists are more restrictive compared to the negative ones. They also create rent-seeking opportunities for the officials who manage trade.

However, given the huge burden of history the two countries carry, it will take both time and effort before trade relations become close to normal, and goods, commodities, services and people begin to flow relatively freely across the border. In this context, it would be useful to indicate some of the opportunities that exist on both sides of the border for the gains that could be made by producers, traders and consumers.

Private industrial and commercial groups in both countries are preparing for more open trade.

One example of the way industry and trade will be affected comesfrom some industrial groups in India. It was reported in both the Indian and Pakistani press that Indian oil companies including the Hindustan Petroleum Corporation (HPCL), the Indian Oil Corporation (IOCL) and GAIL India are preparing to supply petroleum products and liquefied natural gas to Pakistan. There are enormous opportunities in Pakistan for products such as these produced in India.

Pakistan`s refining capacity meets only half of its total domestic requirement while India now exports almost one-fourth of the 185 million tons it refines. A Mumbaibased oil analyst was quoted as follows by the Times of India: `Pakistan`s move to ease trade with India could translate into a big opportunity for HPCL as it will be best positioned to use its Bhatinda refinery as a critical gateway.` This will require the building of a 50 km pipeline connecting the refinery being erected in the Indian Punjab with Lahore in Pakistan.

`We plan to tap capital markets as soon as our Bhatinda refinery nears completion to lay the pipeline` said a member of the HPCL board. Also, India`s largest oil refiner, the Indian Oil Corporation, is examining the possibility of connecting its Panipat and Mutthura facilities with the contemplated Bhatinda-Lahore pipeline.

Liquefied natural gas is another product of interest for the Indianindustry since Pakistan does not have domestic capacity for producing LNG. The Indians estimate that by 2016 Pakistan could experience shortfalls of three billion cubic feet per day. A Pakistan delegation led by petroleum and natural resources secretary visited New Delhi in late March to hold discussion for facilitating trade in petroleum products and petrochemicals between the two nations.

It is worth noting that entrepreneurs in India are looking at the possibility offered by the Pakistani market by not confining their attention to products. There is also talk of exporting services to Pakistan. During the Musharraf period there was a visit from senior Tata officials who wanted to create a presence for their IT wing in Pakistan.

Tata is India`s largest information technology and consulting company. It has expanded rapidly along with several other firms based in India. They have now begun to experience worker shortages in some skills that Pakistan has developed but are not fully employed in its own IT industry.

The Indians were hoping to set up shop in Pakistan. After showing some interest in the Tata initiative, the Musharraf administration backed away, fearing political backlash in the country.

But smaller companies that would not have a large footprint that would invite political noticehave ventured into Pakistan. I know of an Indian-owned company based in Singapore that has Pakistani programmers working in two offices, one in Lahore and the other in Islamabad. The company`sCEO told me that the entire programming work for his enterprise is done in the Pakistani offices since he is able to find the skills he needs at a much lower price than he would pay in his native India.Film industry is another area where the entrepreneurs in the two countries could work together.

A Pakistani newspaper recently reported on a visit to Lahore by Mahesh Bhatt, an Indian film mak-er. He was part of an 11 member delegation from India that came to Lahore to celebrate Bhagat Singh`s death anniversary.

`In 2003, I received a lot of flak in India for saying that the centreof music in the sub-continent was Karachi. Even today that statement rings true,` he told an audience at the Punjabi Complex in Gaddafi Stadium.

`Although Pakistan is going through a dark period, it can still take South Asian culture forward.

He also revealed that he was working on a project with the late Salmaan Taseer for the joint production of a film. The project is on hold following Taseer`s death but Bhatt is confident that he will be able to move forward. `I want to create a film in which 70 per cent of the technical team is from Pakistan, only then the film will be profitable for the Pakistani film industry,` he told his audience.

While India is industrially more developed and its manufactured products will have more prospects in the Pakistani markets, Pakistan should be able to do well in agriculture, agricultural processing, various industrial supply chains, and in some services. There is nothing wrong or belittling about using Pakistan`s potentially rich agriculture sector as leading the way to India. After all, Denmark and the Netherland, two of the richest countries in Europe, are large exporters of agricultural products to other states in the continent. To take one example: Cultivation and marketing of flowers in the areas around Lahore are now big businesses. These could be developed further once the large and rapidlygrowing Indian markets open up for Pakistan. When I was working for the World Bank on Latin America I saw countries such as Colombia and Ecuador reap rich rewards by exporting flowers to the United States. These two countries are not close to America as Lahore is to such large centers of consumption as Delhi in India.

Pakistan`s well developed and rapidly developing fashion industry is another non-traditional area of opportunity for the country.

There are several aspects of this industry that are attractive. It uses locally produced cotton cloth as the main input. It provides employment to a growing number of women. It is managed mostly by women entrepreneurs. It is promoting the development of expertise in some of the educational institutions in the country.

Periodically women from this industry go overseas to sell their produce to the expatriate community in Britain and the United States. For them India offers an even better and larger market.

The important point about the opportunities that will open up as a result of the easing of trade restrictions in the sub-continent is that all of them cannot be anticipated at this point. An alert entrepreneurial class will be able to develop new ideas about products and services as trade begins to flow in an unrestricted way between Pakistan and India.

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Islamabad’s Indifference Towards Global Issues


By Shahid Javed Burki
Published: April 9, 2012


It should be a matter of great concern in Pakistan that the country’s leadership remains totally oblivious to the fact that the global economic and political order is being slowly reshaped. Islamabad is too concerned with the domestic economic and political situation to have the time, or the inclination, to raise its sights beyond its borders. If that sight is raised, one would see the rapidly deteriorating situation in Afghanistan and how the US is viewing Islamabad. It is possibly because the policymakers in the Pakistani capital are so preoccupied with these kinds of concerns that they have ignored the developments that will affect the country in the not-too-distant future.

Pakistan’s policymakers should be concerned that their country has been totally excluded from the deliberations that are currently going on to construct a new — or to reshape the old — global and economic and political order. I find it quite extraordinary, and somewhat disturbing, that the Pakistani media, both the print and electronic versions, gave so little attention to the New Delhi summit of the BRICS (Brazil, Russia, India, China, South Africa) nations. The meeting was held in New Delhi on March 29 when Prime Minister Yousaf Raza Gilani was meeting with important political leaders, heads of the armed forces, and the chief of the main intelligence agency to fashion a new relationship with the US. That meeting appropriately received full media coverage. But the media did not seem too interested in the summit of the five heads of states of the BRICS nations next door in New Delhi.

Hosted by the Indian Prime Minister Dr Manmohan Singh, the BRICS summit discussed a number of issues that should also be of immediate concern for Islamabad and Pakistan’s informed citizenry. That apparently is not the case. One reason why Pakistan is treated with such little respect is that it has made very little effort to get involved in global economic and political matters. There is a lesson to be learned from the way Turkey has positioned itself on the global stage. It was not a very long time ago that Ankara was totally ignored by the international community. Now it is represented effectively in a number of different forums.

The New Delhi meeting was the fourth time that the BRICS leaders have met. The first meeting was held in Russia in 2009. This time around they took up a number of matters on which they believe a collective decision would have a greater impact than acting alone. One of the issues taken up, on which no definitive stance was adopted, was about the restructuring of the institutional structure that supports the old global economic order. They want their countries to have a greater say in the way these institutions are managed and make their policies. Both the IMF and the World Bank are important for Pakistan. The country leans on the former during difficult times. It relies on the latter all the time for development assistance. Not only has Islamabad not taken much interest in the way these institutions are likely to evolve to maintain their relevance in a rapidly changing global economy, the country also has extremely weak official representation in these two institutions.

The BRICS nations have expressed some interest in creating a development bank of their own. If established, this new financial institution will draw its capital from the developing world. All the BRICS nations have large external account balances. China now holds the world’s largest foreign exchange reserves. If it decides to create a World Bank type-of-institution, it will have no problem finding capital for it. The institution might not be able to rival the World Bank in terms of access to resources but it could certainly acquire the significance that the Asian Development Bank enjoys. It should be of interest to Pakistan to keep a watch over the working of the process that might eventually lead to the establishment of a BRICS bank. How will such an institution be managed; who will have access to its resources and how will that access be determined; what will be its lending policies; how will it deal with other development institutions? These are some of the questions that will be raised and when the answers are found, they would serve the interests of the founding members and other developing nations. Is there some ministry or government institution in Pakistan that is concerned with such issues? The answer is, probably not.

Do we, in Pakistan, know that James O’Neill, the author of the BRICS idea has now come up with another suggestion? He believes that the world would do well to watch the progress being made by another group of countries he calls the “new eleven”. This group includes Pakistan along with more dynamic, emerging economies such as Argentina, Indonesia, Mexico, South Korea, and Turkey. These countries have either the demographic size (for instance Indonesia, Mexico and Turkey) or high rates of economic growth (for instance South Korea and Turkey) that will have considerable influence on the working of the global economy. If that idea is picked up, would it also lead to the development of an institutional device or a forum where these countries can actively pursue their interests?

The main conclusion I want to draw from this discussion is that Pakistan’s policymakers are so absorbed in dealing with a rapidly deteriorating domestic situation, that they have not turned their attention towards the way the global system is being reshaped. Islamabad may assign a low priority to what is happening to the economic world some distance away from its borders. This will prove to be costly neglect. We must operate in a system in which we have a voice and a role in developing it. This is not the case at this time. Unless we change our priorities we will be functioning in an environment that will remain hostile towards us, and in which our position will be increasingly uncomfortable.

Source: Islamabad's Indifference Towards Global Issues
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How nations fail?


By Shahid Javed Burki
Published: April 16, 2012


One answer to the question ‘how and why nations fail?’ comes from the authors of a powerful new book Why nations fail, that has become the talk of the development community. In it the authors — James Robinson, a political scientist teaching at Harvard University and Daron Acemoglu, an economist teaching at MIT — suggest that for a number of poor and struggling countries, the future looks grim. In most developing societies what they call “extractive institutions” dominate the landscape and prevent the emergence of “inclusive institutions” without which development cannot and will not occur. Should we apply this idea to today’s Pakistan?

Pakistan has been shaped by ideas. Some of these were developed by those within the society. Some were borrowed from abroad. The two-nation theory evolved from the thinking of Muhammad Iqbal and Muhammad Ali Jinnah. The idea behind it was simple but powerful. These two leaders of the Muslims in British India were convinced that their community will not get a fair deal from a political system that was dominated by the Hindus. They argued for the creation of a separate homeland for the Muslims in which they will they will be able to lead their lives according to their beliefs.

In the area of economics in which Pakistan had initially few thinkers of its own, there was a great deal of borrowing of ideas from the world outside. In the 1950s and the 1960s, economists believed that countries remained poor because they lacked capital. The solution was to augment their meager domestic savings by providing them cheap money. This led to the adoption of plans by the world’s rich nations to transfer 0.7 per cent of their total incomes to poor countries as aid every year. The rich also set up institutions such as the International Development Association, IDA, as an affiliate of the World Bank to provide concessional assistance to poor countries that lacked creditworthiness to tap the financial markets. This approach to development resulted in creating dependence of the poor on the rich.

Pakistan’s geography made it possible for those who dominated politics to trade it off with foreign flows of capital. In taking that route they made the country a slave of those who had the money to give. There were growth spurts in the 1960s under General Ayub Khan, in the 1980s under General Ziaul Haq and in the early 2000s under General Pervez Musharraf. The high rates of growth became possible since easy money became available from the United States in return for supporting the latter’s strategic interests in the area in which Pakistan occupied an important place. The fact that this always happened under military rule is easy to explain. Army rulers could turn Pakistan around without worrying about peoples’ reaction.

This dependence on cheap foreign capital for promoting development did not always work and inevitably resulted in academics asking an important question: Does aid matter? The answer was that most of the time aid-induced development benefitted the rich and the “extractive institutions” rather than the poor. This was certainly the case in Pakistan. In the 1980s and the 1990s, a consensus developed that countries remained poor because of poor economic policies. This emphasis on policies led to the development of a framework that came to be called the ‘Washington Consensus’. It encouraged the developing world to pull the state back from managing the economy and to open domestic markets to both domestic and foreign players. Once, again Pakistan was at the forefront of allowing this idea to shape thinking on development. It was the Musharraf government under the influence of a banker who had worked in a foreign institution all his life that jumped on the ‘Consensus’ bandwagon with predictable results — a high rate of economic growth, increase in income inequality, domination of a few over the institutions of governance.

The situation did not change with the change of regime when the military was replaced by an elected civilian administration. Under the watch of the people’s elected representatives the economy slumped, the incidence of poverty increased, consumption by the rich grew but that by the poor declined, foreign aid declined and pressure on foreign reserves increased. There were negative developments on the political and social fronts as well. Karachi exploded with ethnic violence, the incidence of urban crime increased, while the quality of governance deteriorated. The country appears to be heading for a disaster. With these developments, Pakistan is sometimes called the world’s most dangerous place; sometimes a fragile state; and sometimes it is seen as a failing state. Why did this happen as the country was moving towards the establishment of a democratic system of governance? There was the belief that a democratic system was better at inclusive economic development by which economists mean the pattern of economic growth that provides for the poor and the disadvantaged. Why was that not happening in Pakistan?

Enter Messrs Robinson and Acemoglu to provide an explanation that is relevant not only for Pakistan but for dozens of similarly placed countries. They argue that there is a strong correlation between politics and economics. Causality can run in both directions. In open and democratic systems most changes occur following elections but elections don’t necessarily produce the institutions that provide for inclusive economic development. In the cultures dominated by narrow elites elections strengthen their position. The result is that instead of producing “inclusive” institutions, they develop “extractive” institutions. The latter type of institutions extract from the economy as well as society, for the benefit of the elites. The poor and the less privileged are left out in the cold. This is precisely what has happened in Pakistan in recent years. The making of policy is dominated by those who are committed to serving their own interests, not caring for the society at large. Such an institutional structure can be self-perpetuating and will ultimately lead to social, political and economic chaos. This is how nations fail. We seem to be moving towards that situation.

Source: How Nations Fail?
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Post Reclaiming lost ground

Reclaiming lost ground


By Shahid Javed Burki
Published: April 24, 2012


It is fair to suggest that ever since Pakistan began life as an independent state, it has never developed a sound growth strategy to deliver a high rate of GDP increase that would be sustainable. It followed the simple production function approach put forward be the early thinkers in the field of development economics. According to it, all that was needed for economic growth was to combine capital with labour. Have enough of both and the result would be a respectable increase in national income. Pakistan had plenty of labour but not enough capital. For the latter, it cultivated friends abroad that were prepared to give it the needed funds as long as their interests in the area around Pakistan were kept in mind. First the US, then China, and still later, Saudi Arabia provided the required finance. Consequently, the economy did well when large doses of external finance were available. It performed poorly when the friends tuned away, not happy with what Islamabad was prepared to do in return for the favours it received. The economy has hit a rough patch at this time, partly because foreign friends are not satisfied with what they are receiving in return.

There is, of course, a different approach to development: to mobilise domestic resources for needed investment. But this will need a sense of confidence on the part of those who have the capital to invest in the economy. Economists have long recognised that confidence is by far the most important determinant of economic performance. Those who developed the old growth model had factored it out of their equation. They did not recognise that even if capital and labour are present in abundance, they will only begin to work together if the owners of capital had the confidence that there will be good results produced from their effort. This confidence is absent at this difficult moment in Pakistan’s history. Could this be restored and could the lost ground be reclaimed. The answer is yes, but that would need the adoption of public policies which would provide confidence to the people that those in positions of power will be acting for the larger good of the citizenry, not just for their narrow interests.

The right time to revive confidence will be when a new administration takes office following the next general elections to be held, presumably, sometime early next year. At that time, whoever becomes the prime minister should announce a set of policies aimed at confidence-building. Those who are reflecting on this matter probably have their own lists; my list has two important items.

The first, of course, is improving the quality of governance. Only when that happens that people with capital will begin to invest in the economy rather than sending capital abroad as seems to be happening now. The well-to-do are acquiring foreign assets even when the return from them is much lower than would be the case if domestic corruption had not increased their transaction costs. If it takes a significant proportion of the capital being committed to a particular enterprise just to get the government’s support, there will be a lowering of the rate of return. There are several ways of reducing corruption. One of these is a system of accountability that is effective and efficient and also one in which people have a high level of confidence. Pakistan has tried several systems over the last half-century. They did not work for the simple reason that they were not allowed to be autonomous. They were controlled by the executive branch, the very branch that was to be the subject of accountability. A government that is serious about making elected and public officials accountable must create a system that is beyond the reach of the people and the institutions that are being looked at. This should not be an impossible objective to achieve. The country is working with different approaches to make appointment to offices and functions such as the Chief Election Commission and senior judiciary as free of influence as possible. The same should be possible for those who manage the accountability process.

The regulatory system is another source of corruption and another area that reduces the confidence of the potential entrepreneurs that their investments will provide the needed returns. The current system of regulation was built over time; some of it dates back to the time of the British. The entire structure needs to be carefully reviewed and the provisions that do not serve the citizens’ interest should be removed. One good example is the infamous SRO issued by those who manage external trade to provide relief to a particular industry or enterprise. Giving so much power to one particular part of the bureaucracy almost always invites rent-seeking behaviour.

The new prime minister by announcing just these two measures — an accountability system that is free of influence and the review of the regulatory system with the intention of reforming it — will help to restore the confidence of the currently disheartened likely investors and get them to participate in making the economy work again. Just the fact that the government has an interest in turning the economy around would bring back hope to the community of potential investors.

Source: Reclaiming Lost Ground
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