[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Individual initiatives at Copenhagen[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 14 Dec, 2009[/B]

NOW that the global community is assembled in Copenhagen and that some initial commitments have been made by America and China – with the indication that India may also adopt the approach China is taking – some agreement on climate change may be a bit nearer.

A number of political advances have been made since then. The United States, China and India are now among the four largest emitters of carbon into the atmosphere. All three have declared their intention to act. China became the largest polluter in 2008, passing the United States. India is in the fourth position. No international agreement could be made unless these countries were on board with serious commitments to act. The change of administration in Washington had made a great deal of difference. The United States is led by an individual who had identified climate change as one of his top priorities.

Each capital seems to have influenced the other two to move in the direction in which the world needed to go in order to avert disaster. Climate change was high on the agenda during the visit to Asia by President Barack Obama in November. He appears to have motivated the Chinese to announce their targets before they sent their negotiating team to Beijing.

After returning from the Asian trip, President Obama, using the provisions in the bill passed by the House of Representatives of the US Congress as the basis, announced a set of targets for his government. He said that his administration would work towards reducing carbon emissions by 17 per cent from the level reached in 2005. This target would be achieved by 2020. A more significant reduction was promised for the year 2050.

The Chinese made some pledges of their own, using a different criterion for indicating the kind of effort they were prepared to make. They based their commitments on what was called “carbon intensity”, the amount of carbon emitted per unit of gross domestic output. China said it would lower the intensity by 40 per cent by the year 2020. This means that China will work on new technologies to reduce the consumption of energy for producing additional output.

These announcements propelled India to make its own commitment to slow the emission of greenhouse gases. This was a significant shift for India which until recently had insisted that the brunt of adjustments in making carbon cuts should fall on developed countries rather than emerging nations. Any cut on the part of emerging economies would slow down their rates of economic growth.

India indicated that it will follow the Chinese approach and adopt a target of its own for carbon intensity. According to a senior Indian official, the announcements made by America and China “signaled to us that the global politics has moved beyond everybody sitting behind the table and doing nothing. So a lot of number crunching is going on now.” When the number crunching is done, the Indian position will be presented at Copenhagen as a domestic initiative, not dependent on international financial or technological support.

However, “we have to be very careful that we are not hustled into a position, inadvertently, where our interest is harmed”, said Shyam Saran, India’s top climate change official in an address to the powerful Conference of Indian Industry.

India, in other words, was taking a position that it would not be bound by an international agreement on climate change. It had taken the same position when it refused to sign the Non-Proliferation Treaty, (NPT), to prevent the spread of nuclear weapons. That left it the wiggle room to develop nuclear weapons. Once again, it was not prepared to surrender national sovereignty to an international body implementing an international treaty.

The real issue at Copenhagen is the role emerging markets are prepared to play. The International Energy Agency points out in its World Energy Outlook report that the commitments announced by the large polluters will fall well below the minimum needed. Atmospheric concentrations of carbon dioxide equivalent to 450 parts per million are consistent with two degree centigrade global temperature increase.

The agency notes that energy related carbon dioxide emissions have increased from 20.9 gigatons (Gt) in 1990 to 28.8 Gt in 2007. This is expected to go up to 34.5 Gt in 2020 and 40.2 Gt in 2030. This is equivalent to an average increase of 1.5 per cent a year over the period. Emerging countries account for all the projected growth in energy-related emissions to 2030, with 55 per cent of the increase coming from China and 18 per cent from India. The issue therefore is whether emerging markets such as China and India are prepared to come up with more aggressive targets.

In debating this issue, emerging economies will emphasise the role trade-offs can play. One example of this is provided by the World Bank in its latest World Development Report. “Poor people emit little”, says the bank. For instance reductions in emissions secured by switching the automobile fleet in the United States of just sports utility vehicles (SUV), into cars with European Union fuel economy standards would provide a cushion for the development of the world’s poorer areas.

It would, for instance, cover the emissions from providing electricity to 1.6 billion people in the developing world that currently don’t have access to electric power. This example suggests a number of areas for public policy. A tax on fuel consumption on cars in the United States would encourage drivers to switch from high consumption SUVs to low consumption hybrid and eventually electric cars which are already available in the market.

A large proportion of the resources generated by the tax could be given in the form of grants to the less developed countries for building fuel efficient power plants and for investing in green technologies. At the same time, some of the tax on fuel could be used to subsidise research in producing low fuel-consumption engines.

According to Martin Wolf of the Financial Times, “tackling the risk of climate change is the most complex collective challenge humanity has ever confronted. Success requires costly and concerted action among many countries to deal with a distant threat, on behalf of people as yet unborn, under unavoidable certainty of the costs of not acting. We have reached the point, however, where a broad consensus exists on the nature of the threat and the sorts of policies we need to follow to deal with it.”

As some of the world leaders recognised when they met with President Obama in Singapore, there is not enough time to work out an international treaty at Copenhagen. While some of the major polluting countries had come up with some targets they could factor in their own economic and environmental programmes, it would take much longer to arrive at a consensus on a document that would have the force of an international treaty. Copenhagen could help to arrive at a political consensus with a detailed treaty to be worked out later.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Roots of terrorism[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]By focusing on just one aspect — the US pressure to go after the perpetrators of terrorist activities — we will not be able to evolve a cogent response to growing extremism.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, 15 Dec, 2009[/B]

ALTHOUGH there are still a couple of weeks to go before the new year, 2009 will go down in Pakistan’s exceptionally turbulent history as the country’s bloodiest year — bloodier than the time of ‘Operation Cleanup’ in the early 1990s in Karachi.
The security forces then dealt with a situation that was confined to one city, albeit the largest in the country and that was the result of warring groups seeking to establish their political and economic writ. It was not aimed at destroying the Pakistani state or establishing a new political, economic and social order. It was about control of the city. This time the state is the target. Pakistan is dealing with an insurgency that poses an exis tential threat.

Complicating the situation is the fact that the germs of this insurgency were planted by operators both within and outside Pakistan. According to popular belief the main reason for the development of extremism in the country was the involvement of the US in Afghanistan in the 1980s and the decision by Washington to pull out of the area that, in policy terms, it now refers to as AfPak.

The US left once the Soviet Union withdrew its forces from Afghanistan. But that is only a quarter of the explanation. There were several others. Among these was the social and political engineering of Gen Ziaul Haq who decided on his own and without the aid of public support that Pakistan needed to adopt Islam as the basis of its economic, political and social systems.

Under him, the country went through a wrenching change which was aided and abetted by the several Arab states with which his government had become closely associated. Saudi Arabia was particularly important in pushing Pakistan in that direction. It had helped finance Mujahideen efforts in Afghanistan and also financed the founding and development of a number of madressahs in large cities.

These madressahs taught a version of Islam that was mostly foreign to Pakistan. This is how Wahabi Islam struck roots in Pakistani soil. It flourished in particular in those areas whose people had been exposed to it because of their sojourn in Saudi Arabia.

One relatively less understood reason for the rapid growth of this more orthodox interpretation of Islam is the channel it found through the temporary migration to the Gulf states from Pakistan’s northern areas. This lasted for a decade and a half, from the mid1970s to the early 1990s, and involved several million people from northern Punjab and the NWFP. These workers were hired on fixed contracts, stayed in camps near the construction sites, and spent a good deal of their spare time in the mosques. They thus came under the influence of the local imams steeped in the Wahabi tradition. They brought this interpretation with them when they returned to Pakistan.

Also contributing to the problem is the fact that Pakistan’s political development was arrested because of the repeated involvement of the military in politics. The state’s priorities kept on changing as the leadership provided by the military in politics changed. But there was one thing common in the way all four military dictators governed. They had little confidence in the political will of the people they governed; all knowing, they ruled the country according to their particular whims.

Ayub Khan believed in limited democracy. He called it basic democracy. Ziaul Haq believed in what he thought was the Islamic way — the people should be governed by a pious leader who should not be constrained by the expressed wishes of the people. His only obligation was to consult a group of wise people chosen by the pious leader and assembled in a forum he called the shura.

Pervez Musharraf went back to the Ayubian formula by limiting democracy to a system of local government and a king’s party controlling a largely inconsequential national legislature. Being military men, these leaders believed in strong command and control systems in politics and economics .Since they were distant from the people they could not build popular support for their policies.

By far the most important contributor to the rise of extremism was the way a series of administrations managed the Pakistani economy. For many decades Pakistan experienced one of the sharpest increases in the rate of population growth. The country’s population at the time of independence was only 32 million of which 10 per cent lived in urban areas. It has increased almost five and a half times to 170 million on the eve of 2010.

This implies an average rate of growth of over three per cent sustained over a period of 60 years. Although the country has not held a population census for many years, I believe that nearly a half of this large and growing population is now urban. The urban population has increased at the rate of 4.5 per cent a year, again one of the highest in the world.

Unfortunately these demographic developments were not factored into the making of economic policy. Islamabad should have focused not only in getting the economy to grow rapidly — which it did on occasions and during the periods when the military was in charge – but also on ensuring that the rewards of rapid growth were widely distributed. The result is that the country now has millions of alienated youth with little faith in their future. They have been successfully recruited to jihadist causes. The latest of these is the destruction of the Pakistani state.

In developing an approach towards growing extremism and terrorism it is breeding, policymakers as well as the citizenry must first understand its complex causes. By focusing on just one aspect — the American pressure to go after the perpetrators of terrorist activities — the country will not be able to evolve a cogent response.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Embedding trade in development strategy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 21 Dec, 2009[/B]

PAKISTAN needs a massive dose of economic adjustment to climb out of the hole in which it finds itself today and to ensure that it will not fall into something similar once again. One reason why the country’s economic history is punctuated with severe crises is that policymakers have not addressed some of the economy’s structural problems.

They have not done this for at least three reasons. One, some of the policymakers who took upon themselves to strategise about the future – this, we should remember was not always the case – took the wrong road to development. That may have produced high rates of growth over the short- term as happened in the ‘sixties, the ‘eighties and the ‘nineties but these growth spurts were always followed by severe downturns. The growth-oriented strategies could not be sustained over time.

Two, the roller-coaster political ride the country has taken since its birth has meant that popular support for pursuing the right agenda for introducing sustainable economic development never really developed. In the absence of such support, policymakers came under the influence of narrow but powerful economic interests that distorted the economic system to provide them with favours.

The power of these groups – groups such as the textile, cement and sugar lobbies or the big landlords – could not be checked by appealing to larger constituencies since the political system was so often dominated by narrow economic interests as well. Change may now be occurring and this may be a good time to begin to reflect on how it could move the strategy for growth and broad development in the right direction.

Three, even when policymakers were inclined to think in terms of the longer-term, they lowered their sights and saw only the opportunities available inside the economy rather than the outside. One consequence of this was the pursuit of what economists call, the “import substitution approach to economic development”. The only exception to this was the period of President Ayub Khan when the government adopted a dual exchange rate policy to promote exports. However, this introduced severe distortions into the economy from which the country is still suffering.

Textiles is one sector which has developed as a result of these policy missteps. It continues to dominate the economy as well as exports, remains dependent on government largesse and public subsidies, is responsible for keeping the economy mired in low-technology output, and continues to direct the government’s effort in increasing exports by concentrating effort on the wrong lines of products – wrong in the sense of the contribution to the economy – and on the wrong markets. It is a testimony to the economic and political power of this sector that this is one of the few areas of public policy in which there has been consistency even with the changes in governments and political systems.

To be more specific, I believe it is inappropriate for Islamabad to spend so much political capital in improving access to the United States’ markets for a small number of textile products. The American textile market is not growing much; if there is growth, it is limited to high-end products which Pakistan does not produce.

For the low value added products such as towels and hotel linen, Pakistan must compete with a number of poor countries some of which have the designation of “least developed nations”. As such they enjoy duty-free access to the American market. Giving Pakistan’s producers an equal access would be a zero-sum game; Pakistan’s gain will be some other country’s loss. This makes it a hard sell. Also, by focusing so much attention on the American market, Pakistan is going against what economists call the gravity model of trade. According to this, mass and distance should be the main criteria for picking trading partners. The United States has the mass, but being thousands of miles away it does not have the advantage of distance. China and India qualify on both counts as the best markets for Pakistan. Focusing on both, however, would mean bringing about fundamental changes in the structure of the economy as well as the way we look at the world.

Take for instance some of the recent economic developments in China. These indicate that the country is becoming a significant global economic player not just as an exporter but also as a consumer of manufactured products. China is overtaking the United States as the world’s biggest market, from cars to refrigerators to washing machines, even desktop computers. Automakers will sell 12.8 million cars and light trucks in China this year, virtually all of them made in China, compared with 10.3 million in the United States. Appliance manufacturers expect to sell 185 million refrigerators, washing machines and other pieces of kitchen and laundry equipment in China this year compared with 137 million in the American market. In desktop computers, China moved solidly ahead of the United States in the third quarter, buying 7.2 million compared with 6.6 million in the United States. China, in other words, while reaming an export powerhouse, is also becoming a global centre of consumption for many products.

The challenge before Pakistan, therefore, is to integrate its economy more fully with that of China’s than continue to try hard to achieve a deeper penetration of low value added products into the saturated American market. But as the experience of other countries in Asia shows, working with Beijing can be difficult. Like Pakistan, Indonesia, for instance, also negotiated a free trade arrangement with China only to find that the growth in bilateral trade created a huge imbalance in Beijing’s favour. In the past four years, Indonesia has swung from more or less parity in bilateral trade to a deficit equal to one-third of its annual exports. The deficit continues to increase.

Pakistan’s experience has been similar. The problem China poses for its trading partners was well described by Jong-Wha Lee, the chief economist of The Asian Development Bank who noted that while Japan and South Korea were also economic juggernauts – and were also criticised – when their state-backed industries increased their exports, the problem presented by China is different. “Not just the size, but the speed of China’s emerging power is really unprecedented in the region. So it creates a lot of issues – not just trade and exchange rate policies.” These include the way the Chinese use the state to manage labour and raw material costs and provide exporters help with transporting and managing their merchandise.

An export strategy directed at exploiting China’s rising economic power, therefore, must cover a number of areas other than those included in the free trade agreement concluded between Pakistan and China. It should incorporate investment by China in both public and private sectors of the Pakistani economy as well as transfer of technology.

The two countries should improve the physical infrastructure linking them. There should be alliances formed between potential suppliers of parts and components to China’s rapidly developing industry.

And, Pakistan should obtain help from China to improve the quality of its human resource. All this needs to be embedded in an integrated development strategy, not just a free trade agreement.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Radicalisation abroad[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 22 Dec, 2009[/B]

FOR decades Pakistan has relied on remittances from its workers abroad to finance economic and social development at home. In 2009, one of the most difficult years for the Pakistani economy, the only thing that showed some improvement was the level of remittances.

While exports declined by six per cent and imports by 10 per cent, remittances increased by 22 per cent. Without an increase of this magnitude Pakistan’s external situation would have been even more difficult today. The fact that the State Bank of Pakistan was able to rebuild its external balances to a comfortable level owed a great deal to this steady increase in the then level of remittances. Any disturbance in this trend will have grim economic consequences.

For years the US had become the largest source of remittances from abroad, as the people who traced their origin to Pakistan became more involved with the development of what was once their homeland. However, much to the concern of many, the Pakistan-US link seems to be providing another type of flow: there are some among the Muslim community in the United States who seem to have decided that they should join what they view as the Muslim world’s fight against the Christian West. Some of these misguided people are heading towards Pakistan.

The arrest in Pakistan some time ago of five young men from the suburbs of Washington on suspicions that they were planning to fight against the Pakistani state and the US has raised a number of disturbing issues. They need to be addressed seriously by the people of Pakistan, by the Pakistanis in the United States, by Washington and by Islamabad. If what we are witnessing is a trend it will have worrying economic, political and social consequences for Pakistan. It will, most certainly, isolate the country even more from the world at a time when it needs external support for dealing with an unprecedented economic crisis.

A comforting conclusion was reached by many analysts and possibly also by Washington that there were good reasons why the United States was spared another terrorist attack following 9/11. It appeared that the focus on homeland security kept potential troublemakers out of the country. And there was the belief that the Muslims in the United States were not vulnerable to radicalisation.

Was the latter conclusion incorrect? Are the American Muslims susceptible to the kind of influences and pressures that have driven so many of their co-religionists in Europe to take desperate action against the countries in which they reside? According to one analyst, “the notion that the United States has some immunity against terrorists is coming under new scrutiny”.

The conclusion that the American Muslim community has not been radicalised seems not to be entirely correct although by and large it is better integrated in the US economy and society than is the case with the one in Europe. This is in part because a large number of Muslims in the United States have different socio-economic backgrounds than those who went to Europe.

Are the Pakistanis in America more inclined towards radicalisation than Muslims from other communities? There have been disturbing incidents of terrorism in America lately, as well as apparent intentions of committing them. Many have either involved young men from Pakistan or visits to Pakistan for training to commit violence. The fact that Pakistan has become the hub of global terrorism inspired by various Islamic causes should be of considerable concern to Islamabad.

What are the various choices available to the makers of public policy to stop this situation from deteriorating? First, Washington needs to ensure that in its zeal to protect itself, it should not further limit access to the country to Pakistani youth. It is becoming increasingly difficult for Pakistanis to get visas to attend colleges and universities in the US.

This is unfortunate since Pakistan’s educational system is extremely weak and one way of compensating is to send the youth to institutions in America. Restricting this will alienate the Pakistani youth even more. Washington should also encourage non-radical imams teaching and giving sermons at the various mosques in the country to stop the young from drifting towards extremism.

While the US has a role to play, much of the action needs to be taken by Islamabad and the country’s provincial governments. There are two obvious areas of policy intervention. The first, of course, is improving the educational system. This needs to be done at all levels. Not only has Pakistan neglected primary education, it has also paid relatively little attention to higher education. Without improving the skill base of the vast army of the young in the country — Pakistan with a median age of 18.2 years has one of the youngest populations in the world — the youth will continue to be attracted to radical causes.

Of equal importance is the action by the state against organisations in the private sector that have openly recruited the young for pursuing extremist causes. There is no point in denying that this was being done by the state to compensate for India’s growing military strength. The jihadi groups were being prepared to do battle in case the two countries went to war again.

This strategy has massively backfired. These groups have turned on the Pakistani state and the Pakistani people. The state policy has taken a 180-degree turn. These groups have to be eliminated by the use of all means, including force, available to the state. Keeping them in reserve as insurance against India will not work. This is now the time for Pakistan — the government and the people — to move against extremism. Not pursuing this objective with the full might of the state and citizenry will do the country even more harm.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Pakistan and the global economy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 04 Jan, 2010[/B]

FOR the global economy, 2009 was a bad year. For the economy of Pakistan it was one of the worst in the last six decades. How will the world and the Pakistani economies shape up in 2010? Will the performance of the former affect that of the latter? Let me begin with the second question first.

In spite of a relatively low share in world trade – relative to the size of the economy – Pakistan is affected by global developments. Two of these are particularly important: the willingness of rich governments to finance from their budgets development expenditures in countries such as Pakistan and the willingness of the private sector to finance investments in the developing world.

Both types of flows depend on the economic and financial health of developed countries as well as those that are gaining economic strength. When developed countries face economic and financial stress, as they did in all of 2009, their financial sectors adopt a very cautious approach in putting money into risky places such as Pakistan. Concerns about security were not the only reason why the Karachi Stock Exchange dived in 2009. Many foreign investors who had bet on the KSE pulled out for financial reasons. Will we see a reversal of that trend? That brings me to the first question.

There is consensus among economists that the financial crisis is over; yet a durable recovery is not yet in place. The recovery that has taken place occurred largely because of the stimulus provided by various governments to their economies. This has resulted in large fiscal deficits and, therefore, that approach cannot be sustained.

According to the Organisation for Economic Cooperation and Development (OECD), the United States will run a fiscal deficit of about 11 per cent of its gross domestic product in 2009 while the current account deficit will be three per cent. By definition this implies that the private sector ran a surplus of eight per cent of GDP. This represents a major shift in the patterns of consumption by the private and public sectors

In 2007 the private sector ran a deficit of 2.4 per cent. This shift of 10.4 percentage points means that consumers are saving a good part of their current incomes and are spending considerably less. This means that there will be a decline in the rate of growth in imports, possibly in their level as well. Developing countries will not be able to rely very much on exporting their way out of the economic slowdown they are experiencing. This is why I have been arguing against Pakistan placing too large a bet on gaining greater access for its textiles on the markets in the United States.

How will developed economies perform in 2010? If the private sector rate of savings drops to three per cent of GDP in the United States and the current account deficit increases to four per cent, fiscal deficit will have to be seven per cent of GDP, four percentage points lower than in 2009. For a lower deficit to sustain recovery and growth, new growth engines must be found. The favourite candidate for that is the consumer in China, notorious for being excessively thrifty. This will mean rebalancing the global economy without which there may be at best a slow recovery or possibly a double-dip recession.

With the developed world still struggling to emerge out of crisis, countries such as Pakistan should shift their attention to China, the new growth pole of the global economy. China has raised its GDP growth estimate for 2008 from nine to 9.6 per cent. The revision results from an economic census that shows a bigger contribution of services to GDP. China’s expected expansion in 2008 compares with the US growth of less than one per cent while Japan’s GDP shrank by 1.2 per cent.

The Chinese GDP grew by 6.1 per cent in the first quarter of 2009, by 7.9 per cent in the second quarter and by another 7.9 per cent in the third. It will increase by more than eight per cent in 2009 when it will overtake Japan as the world’s second largest economy.

The accelerating pace of growth is attracting more foreign direct investment into the country. It climbed 32 per cent in November to $7 billion. Luxury carmaker BMW said last month that it will build a new factory worth $732 million in China to tap an auto market set to overtake the United States as the world’s largest market. General Motors, the largest American carmaker, has announced a deal involving auto producers in China and retailers in India. Small cars manufactured in China will be offered for sale in India as GM brands.

The Indian economy increased by 6.7 per cent in the fiscal year that ended in March 2009. That expansion is likely to continue in 2009-10 fiscal year. The relatively robust performance of the Indian economy and its expanding consumer base is also attracting foreign capital, particularly in the auto sector. Ford Motor Company has announced plans to develop a small car designed by India’s engineers. It will be first offered for sale in the large domestic market and then will become available for export to the developing world.

What do these rapid-fire changes in global structures mean for Pakistan’s struggling economy?

There are three lessons for Pakistan from the experience of other large world economies. One, it may be useful to think in terms of reviving growth. In an article contributed to the Financial Times by Kemal Dervis, my former World Bank colleague, who went on to become Turkey’s finance minister, it is argued that “developing economies, apart from China, should be encouraged to borrow more too. To achieve this, the world will need to promote substantial institutional reforms, including greater insurance against risk of crises, via expanded resources for the International Monetary Fund.” In other words leveraging should be allowed and encouraged in countries such as Pakistan to revive growth. Without growth they will face costly social and political problems.

Two, Pakistan should factor into policymaking the fact that it borders two trillion dollar economies that are not only large but are also growing rapidly. China’s gross domestic product is now estimated at $4.8 trillion while that of India at $1.7 trillion. The two economies are together adding every year about $455 billion to their combined product.

Since that expansion is happening right next door to Pakistan, it should be able to draw some benefit from it. That can be done in a variety of ways which is the third lesson to be drawn. Islamabad should find a way of better integrating some parts of its economy with some of those in China and India. The rapidly growing automobile sector offers an opportunity but that will need the state to give incentives for developing the auto-vending sector.

What all this implies is that Pakistan will have to think creatively and dynamically about the global environment in which its economy must function rather than continue with old habits and old assumptions.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Economics and extremism[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 05 Jan, 2010[/B]

THERE cannot be any doubt that there is a relationship between poor economic performance and the rise of extremism and resort to insurgency. That such a relationship exists and should inform counterinsurgency efforts is contested by some experts.

Scott Altran, an anthropologist, has studied the operations that led security forces in Indonesia and the southern Philippines to beat back insurgencies in those two countries. He suggests a different strategy from the one being pursued by the Americans in Afghanistan and the military in Pakistan.

He argues for a different perspective, “one that is smart about cultures, customs and connections. The present policy of focusing on troop strength and drones, and trying to win over people by improving their lives with western-style aid programmes, only continues a long history of foreign involvement and failure. Reading a thousand years Arab and Muslim history would show little in the way of patterns that would have helped to predict 9/11, but our predicament in Afghanistan rhymes with the past like a limerick.”

This line of thinking is based on the view that for some inexplicable reasons the Middle Eastern man — possibly also the man from the Pakistani hills — is different from the rational western man who, economists believe, wants to maximise his welfare.

For some reason the tribal people of Afghanistan and Pakistan are much too interested in their traditional codes of behaviour — the Pakhtunwali — to embrace economic, political and social modernity. “Afghan hill societies have withstood centuries of would-be conquests by keeping order with Pakhtunwali in the absence of central authority,” writes Altran. Such a view would keep the tribes in this part of the world locked in the past, concerned only with looking after their social values.

The areas of Pakistan in which insurgency has taken hold have seriously lagged behind those which have fared better in economic terms. Although Pakistan does not have national income accounts I have developed some rough estimates of provincial gross domestic products and income per head of the population in the various provinces. I estimate that Punjab, the country’s largest province in terms of population, also has the largest economy.

While the province’s share in national population is a little more than 55 per cent of the total, it accounts for 57 per cent of GDP. The province of Sindh, the second largest in terms of population, has almost 23 per cent of the population but 27.5 per cent of GDP. The NWFP has 13.7 per cent of the population but only eight per cent of GDP.

Balochistan, the largest province in terms of area and possibly also the richest once its energy and mineral resources are fully explored and begin to be exploited, is the least dense of the country’s provinces. It has slightly more than five per cent of the population but at this

time only three per cent of GDP.

Although population and national income data for Fata are not very reliable my guess estimates for the share of the two are 2.4 per cent and 1.5 per cent respectively. Islamabad, the last geographical entity in the country has 0.8 per cent of the population, and one per cent of GDP.

Translating these numbers into income per head of population is particularly revealing. Sindh with $1,270 per capita income is the country’s most prosperous province. The poorest is the NWFP with an income per head of only $606, half that of Sindh’s and not much more than half that of the Punjab average.

Fata has an income per head of $663, slightly more than that of the NWFP. The larger Fata income may be explained by the significant amount of remittances received from outside, sent by the workers from the area employed outside the region. Some of the workers are in Pakistan’s large cities and some in the Middle East.

The mobility these people have shown is contrary to the impression of some anthropologists that the Pakhtuns of the hills in Afghanistan and Pakistan shun opportunities to better their economic situation. They would respond positively to attempts made at improving their lives. Not counting those who have taken up arms to pursue ideological agendas a large number of people have been recruited to the cause since they have lost faith in their future.

These income disparities don’t tell the full story. There are considerable differences in the incomes of people living in different parts of the provinces. People in southern Punjab, which has become a centre of insurgency, probably have incomes less than half the provincial average; perhaps as low as one-third of those in the more prosperous districts of the province.

The same is the case in other provinces. In rural Sindh, for instance, income per capita is probably one-fifth that in Karachi. This is not surprising since Karachi is the country’s centre of industry, finance and international commerce.

Political scientists have long worried about the distress produced in societies in which there are sharp income differences. Somewhat belatedly economists have come to the same conclusion. In Pakistan these economic disparities have resulted in great violence against the state and the citizens of the country. Some of the elements within society have been behind violence mostly for ideological, reasons. Insurgency in Pakistan has been caused by the merger of several different streams. If we look at the growth of extremism in the country we see that it is concentrated in the more backward parts of the country.

Any strategy aimed at improving the standard of living in the country’s economically and socially backward areas should recognise the preponderance of the very young in their populations, aim to exploit the resources and skills available in these areas and bring about greater integration of the regions into the national economy. Such a strategy will lead to the pursuit of very different approaches in several troubled parts.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Balancing regional economic growth[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 11 Jan, 2010[/B]

THE chief ministers of the four provinces signed the seventh National Finance Commission award on December 30. The signing ceremony was held at Gwadar and watched by Prime Minister Yousuf Raza Gilani. The award will come into force on July 1. The venue was chosen to reflect the desire of all provinces to end years of deprivation of the country’s largest province by area, Balochistan.

The constitution of 1973, adopted after East Pakistan departed from the federation and became independent Bangladesh, was sensitive to the needs of the smaller provinces – smaller in terms of the shares in the population of the truncated country that emerged in December 1971

Since East Pakistan chose to quit the federation largely because of its unhappiness with the way it had been treated by the centre for providing resources for development, those who framed the 1973 constitution were keen to build into the governing structure mechanisms for dispute resolution.

The constitution provided for the convening of NFC to apportion funds collected by the federation but assigned to a pool called “divisible” since they were meant to be used by the provinces. The NFCs were to be convened every five years. It also provided for the constitution of a Council of Common Interests made up of chief ministers of the four provinces and four members representing the federation and appointed by the prime minister.

The CCI could establish commissions of experts if an issue needed to be explored in depth before a solution could be worked out. The constitution also provided for conducting population censuses at ten year intervals so that the seats in the national assembly could be assigned on the basis of population. Unfortunately these provisions were largely ignored. There was a gap of 26 years between the censuses of 1972 and 1998; there was an interval of a dozen years between the sixth and the seventh awards made in 1997 and 2009.

And the CCI was never convened for the purpose of handling provincial grievances. One reason why the federal provisions of the constitution were not fully followed was the domination of the political system by the military which directly governed for 19 years since the adoption of the constitution 36 years ago. Believing in central command and control, the military has little appetite for power sharing. Happily the adoption of the seventh award may usher in a period of greater say by provinces in their own affairs.

The Gwadar accord will replace the sixth award that was signed in January 1997, negotiated by the care-taker government that succeeded the administration headed by Prime Minister Benazir Bhutto. As the finance minister in the care-taker administration, I chaired the negotiating committee. Then as now there were essentially three issues before the provinces. The first was the provincial share in the pool of resources with the federal government that were regarded as “divisible”, which is to say that they were there available for transfer to the provinces. The second was the formula on which the federal pool was to be divided among the provinces. And third was the extent to which the more developed provinces should subsidise the development of the backward provinces.

Its two main features are; one, a larger share of the provinces in the federal divisible pool and, two, greater allocation to the more backward provinces, Balochistan and the North-West Frontier Province. The provincial share in the divisible pool will increase from 47.5 to 56 per cent. Under the formula agreed by provincial chief ministers Punjab will receive 51.74 per cent of the divisible pool, Sindh 24.55, NWFP 14.62, and Balochistan 9.09 per cent. Punjab’s share is 1.27 percentage points lower than the one received in 1997, Sindh is lower by 0.39 percentage point, and NWFP by 0.26 percentage point. Balochistan is the only province that saw an increase in its share. Compared to the 1997 award, its share will be 1.92 percentage points higher.

These shares were worked out on the basis of a formula that included population, incidence of poverty, collection of revenues, and generation of revenues. Population was given a weight of 82 per cent in the formula, poverty 10.3 per cent, revenue collection 2.5 per cent, revenue generation 2.5 per cent and area 2.7 per cent.

There are several ways of working out the extent of the sacrifice made by the two relatively more prosperous provinces in the federation to promote the development of those that are less advantaged. After all that was the intention of framers of the constitution of 1973. They built several provisions into the political arrangement they devised, if implemented, would have quickened the pace of development of the poorer provinces that were also smaller in terms of their share in the population.

However, these provisions of the constitution were largely ignored with the result that both Balochistan and NWFP have lagged behind Punjab and Sindh in developing their economies. Looked at from this perspective, the NFC 2009 award has made a real breakthrough.

In estimating what the richer provinces are doing for those that are relatively poor, I will look at the award from two perspectives: population and gross domestic products. Population estimates for the provinces are available for 2007 from Pakistan Economic Survey, 2008-09. That unfortunately is not the case for provincial gross domestic products which is probably the reason why the formula used for assigning shares in the divisible pool does not include GDP. I have used provincial shares in irrigated area and in the distribution of enterprises to estimate provincial GDP for the purpose of this analysis. Using the ratio of the shares in population to the shares in the NFC award, Punjab has made a significant sacrifice in providing for the other provinces. Its share in the award is almost nine percentage points lower than would have the case had the distribution been done on the basis of population. From that perspective the most generous terms are for Balochistan that was given 71.7 per cent higher share than its share in population. Punjab is the only province that received a lower share; even Sindh received 3.8 per cent more than its share in population.

Looked at from the perspective of the shares in gross domestic product, a slightly different picture emerges. Both Punjab and Sindh – the former a bit more than the latter – have sacrificed to accommodate the needs of the smaller and poorer provinces. I estimate Punjab’s share in GDP at 60.5 and that of Sindh at 28.2 per cent. Comparing these to the shares in the award suggests the element of sacrifice – or the amount of resource transfers – the two provinces are making to help the poorer areas. Punjab has accepted a share 14.5 percentage lower and Sindh 13.1 per cent lower than would be justified had the award been made on the basis of shares in GDP.

The Gwadar award has thus set the stage for the greater say of the provinces in their own development and for the richer provinces to aid the poorer ones in quickening their pace of development. Those who rule from the center must also take steps to implement other provisions of the constitution aimed at creating a functioning federation.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Quadrilateral ties[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 12 Jan, 2010[/B]

ONE important component of the developing global structure is the evolving relationship among four countries: China, India, Pakistan and the US. Three of these countries are in Asia, the fourth is still the only superpower in the global economic and political systems.

The most important of these relations are between the US and China, between India and China, between India and the US, between Pakistan and the US and between India and Pakistan. Each of these has its own dynamics. That said they together form a quadrilateral relationship that is inherently unstable. The challenge for these countries is to bring about stability to this relationship in a way that it serves the interest of all four countries.

Three relatively recent developments and two that go back several decades have created a web of dependency in this quadrilateral relationship. Although Pakistan and the US have worked with one another for decades, the nature of this relationship was transformed by 9/11.

While the attention of the West is likely to shift to Yemen following the botched attack on an American plane on Christmas day by a Nigerian man who was allegedly working for Al Qaeda in the Arabian peninsula, Pakistan is likely to remain the epicentre of global terrorism. At the time of his inauguration as president, Barack Obama made it clear that “our nation is at war against a far-reaching network of violence and hatred and … we will do whatever it takes to defeat them and defend our country, even as we hold the values that have always distinguished America among nations”. Pakistan was at the centre of this network.

The second recent development behind the evolving relationship was the rapid economic rise of China, accelerated by the way it handled the recent crisis in the global economy that experts now call the ‘great recession’. Beijing was able to use the economic power of the state to stimulate the economy much more effectively than was done by the leaders of other large economies. The result of its more successful approach was that 2008 and 2009 saw a mild slowdown in the rates of economic growth and change. The Chinese economy is now returning to the high growth rates that have marked its performance over the last quarter of a century. It is likely to overtake Japan in 2010 as the second largest economy in the world.

The third development was the election of Barack Obama as US president. After his inauguration in January 2009, President Obama has shown remarkable willingness to accept that his country will not remain as dominant a player in the global system as was expected after the collapse of the Soviet Union in 1991. He remarked repeatedly during his November 2009 visit to East Asia that he was willing to work towards a global system in which the US would be closely aligned with China to lead the world towards sustained economic prosperity and peace.

In fact, he began to lay the foundations of a G2 arrangement that will sit on top of other multilateral arrangements such as G20, the World Bank and the IMF. What seems to be evolving is a three-tier global structure with G2 at the top, G20 in the middle and everybody else at the bottom.

The two developments that go back for decades and will inform this quadrilateral relationship involve Pakistan. The first of these is the long enduring hostility between India and Pakistan that is the consequence of the enormous differences in the two ideas of statehood they represent.

The idea of India is the belief that it is possible to construct economic, political and social systems that would provide for different religious, linguistic and social groups in a way that none would wish to opt out. This idea was espoused by Jawaharlal Nehru, the first prime minister of India, but was rejected by Mohammad Ali Jinnah whose idea of Pakistan was built around the belief that the Muslims of British India needed a state of their own to prevent their identity from being submerged by those who followed different systems of beliefs.

To these differences in the two ideas was added the problem of Kashmir that has defied resolution since it is anchored in these two conflicting meanings of statehood.

The other old development that will influence the evolution of this quadrilateral relationship is the ‘all weather friendship’ between Beijing and Islamabad. Its foundation was laid by Zulfikar Ali Bhutto in the mid-1960s to counter the growing influence of the US on Pakistan. Bhutto considered that relationship to be unequal, countering President Ayub Khan’s claim that his country was a friend and the US was not a master in the arrangement that he had worked out. Bhutto said that that claim was a myth. With China brought in to balance the US, it has remained there while the environment in which Pakistan functions has been through several serious convulsions.

These included the break-up of Pakistan when its eastern wing emerged as the independent state of Bangladesh and, more recently, the destruction wrought by the rapid rise of Islamic extremism in the country.It is quite normal — in fact it is expected of nations — for countries to pursue their own interests in working out relations with other states. Economists have a concept they call ‘Pareto optimality’ according to which multiparty relationships can only become stable when all parties gain and none loses.

Applying this to international relations, the question arises as to how this goal can be achieved. One way of doing this would be to get the four countries involved to sit around the table — a G4 arrangement — to work out how they can move forward so that none is hurt but all benefit. Given the centrality of some of the concerns that surround this group of countries, a working relationship between them will bring large dividends to the rest of the world as well.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]China’s shift to new growth model[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 18 Jan, 2010[/B]

IT has gone largely unnoticed by most China experts that its rapid economic revival after a sharp slowdown in 2009 is the consequence of Beijing pursuing a different model of economic growth.

The new model once again places much greater emphasis on the role of the state, concentrates much more on increasing domestic demand for the products of the expanding industrial base, relies on building trading ties with the countries in its immediate neighborhood and signals that there will be a major shift in the structure of the economy.

The last two elements in the model are especially significant for Pakistan, a country that has as yet to take full advantage of its close proximity to the fastest growing economy. I will come to this point later in the article.

China’s initial growth spurt that began in the early 1980s and lasted for over a quarter century was influenced by the development of thinking in the West in particular in Britain and the United States. With conservative leaders such as Margaret Thatcher in Britain and Ronald Reagan in the United States politically ascendant, the role of the state began to be redefined.

The government’s influence on policymaking had increased enormously in the periods immediately before the Second World War and for a quarter century after the end of that conflict. Then the Western governments, especially those in the Anglo-Saxon part of the world, had accepted the prescription advanced by John Maynard Keynes, the British economist, according to which the belief of classical economists that man was an entirely rational being who would always work for maximising his welfare was not entirely accurate.

Economic systems build around this belief were expected to produce full employment. That did not happen at the time of the Great Depression which brought Keynesian thinking to the forefront. Keynes developed a point view that economies could operate well below the state of full employment.

In fact, there were reasons why human reaction to unexpected changes in the environment could send the economies into a spin. The only way to prevent this from happening was for the state to step in with large, employment generating expenditures. This is precisely what the administration of President Franklin Delano Roosevelt did in the United States and rescued the country from depression. Other western countries followed the same path.

However, growing prosperity in the 1980s was attributed largely to private initiative and enterprise. Since government deficits had risen in the periods before the economies began to take off, the pendulum of economic thinking swung in the other direction. Now the role of the government was to be constrained. As President Reagan said, “government was not the solution, it was the problem”.

Under the influence of Milton Friedman, the state stepped out of the way leaving much of the economic field to the private sector. This philosophy was also reflected in the advice that was given to the developing world by the development and financial institutions based in Washington. Called The Washington Consensus.

Governments in the developing world were advised to step out of the way of the private sector, provide the private sector expanded markets by opening their economies to trade, and allow private entrepreneurs to obtain funds and technology from abroad.

While China never fully accepted the Washington Consensus approach, it was certainly influenced by it. It allowed much greater freedom of action to the private sector. A large number of state-owned enterprises were shut down and the labour freed by them was absorbed by the rapidly expanding private sector. Large amounts of foreign money flowed mostly in the form of investments.

Exports to the West increased rapidly and China built up large foreign exchange reserves which it deployed mostly to purchase United States Treasuries. The model produced high rates of GDP growth that remained close to double digits for nearly thirty years. The economic and social change that resulted from this has no historical precedence.

However, this model also tied China very closely to the West, particularly to the United States. When the latter was hit by a severe crisis, China was also affected. Consequently in rethinking their approach to development, the Chinese have begun to turn the state once again as the driver of economic change and on linking their economies to those closer to their borders.

They have also decided to solve the problem of the continuing backwardness of the western provinces such as Xinjiang and Gansu by encouraging migration to the east. This will result in China going vertical since most of its cultivable land is located near the east coast. The likely development of its textile industry is an interesting example of what is likely to happen and how it might affect Pakistan. The Chinese would like to import such products as yarn and fabrics – both produced in factories that use a lot of land – to produce garments and other finished products that can be done in high-rise buildings. This may explain why the Chinese demand for Pakistani yarn has increased significantly in recent months. This change in strategy has begun to produce positive results for China. The recently released data on exports in December shows that they rose by 17.7 per cent year-on-year, the first time in 14 months that exports have increased. With this increase, China has surpassed Germany as the world’s largest exporting nation. While sales to the United States and Europe – the two together account for about half of exports – increased by 15.9 and 10.2 per cent respectively, it is trade with the neighbouring countries that made the most impressive gains.

The December figures show a 51 per cent year-on-year increase in processing imports. These are imported parts and components assembled into all kinds of finished products for exports by China. A significant proportion of these come from Asia. China is also becoming an exporter of parts and components. The range of items exported is expanding towards the more sophisticated end of the spectrum. For instance, several parts of the recently launched “Dreamliner” by Boeing in the United States are being made in China.

As Pakistan develops its own export strategy, it would do well if it concentrates more attention on developing markets for its products in China than on continuing to work on gaining and increasing market access in the United States and Europe. By concentrating on the latter two markets, it is likely to stay at the less value-added chain of products. By developing trade with China it can enter into strategic relationships with various industries in China.

There are many industries that could become candidates for this kind of approach. These include defence related industries as well as automobiles, electronics and health equipment. The service sector could also benefit from an approach based on selecting the winners for building a robust trading relationship with China. The most efficient way of implementing such an approach would be for the government to set up a multi-ministry taskforce that could develop proposals for discussion at the high political level.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]New global order[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 19 Jan, 2010[/B]

AS the world enters the second decade of the 21st century, the global political and economic structures are being reshaped in significant ways. The previous system was the outcome of a major conflict, the Second World War.

It was dominated by the country that played a decisive role in defeating the Nazis in Europe and the Japanese in East Asia. The system that emerged had institutional structures in the areas of economics and international politics. In both the United States, the victor in the Second World War, was the leader. It was challenged for a while by the Soviet Union but its collapse in 1991 left it as the sole superpower.

Some analysts, most notably Francis Fukuyama, labelled this development the end of history, arguing that with communism beaten back so decisively, the world would proceed in one direction. Liberal democracy and capitalism would be the accepted ideologies for managing the political and economic systems.

This triumphalism lasted for about a decade. Two far-reaching developments took place in the first decade of the present century. On Sept 11, 2001, 19 terrorists belonging to an obscure Islamic group not much known in the West struck the United States destroying the twin towers of the World Trade Centre in New York and badly damaging the Pentagon near Washington. Almost 3,000 people were killed, the largest loss suffered by the US on its mainland since the civil war. The US responded by first invading Afghanistan and later Iraq, two Muslim countries in the heartland of Islam.

Was the clash of civilisation predicted by the political scientist Samuel Huntington, asked many analysts? And then six years later the US economy began collapsing and for several months it appeared that the country along, with the rest of the West — perhaps also parts of the emerging markets — was heading towards the kind of economic collapse seen during the years of the Great Depression.

It was in the midst of these crises that the American electorate chose a new president, Barack Obama, sending to the White House the first black American to occupy that hallowed space and the one who won the election promising both change and hope. He brought the first while the second has still not manifested itself. While the US was dealing with these challenges, China began what in an earlier work I called the country’s “second economic rise”. President Obama has reacted to the arrival of this challenger in the field of economics in a surprising way. Rather than attempting to contain China as most of his predecessors would have done, he has expressed a strong desire to work with this new challenger to reshape the global economic order.

One important point that should be made at this stage is that this time around, the global structure is being reformulated as a result mostly of economic developments, not because of the end of a military conflict when power passed from the vanquished to the victorious. This certainly occurred after the end of the Second World War. It was also military defeat that led to the change in the political order in the Middle East when the victors carved up the Ottoman Empire into many pieces with unanticipated consequences. This time the impetus for change is coming from economic developments.

The effort to change and transform the world was begun in some earnestness in November last year when the new American president paid his first official visit to East Asia. What emerged from this visit was a new three-tier system of global governance with America and China at the top, the G20 in the middle and the rest of the world at the bottom of the arrangement. Is this a sustainable arrangement or will it be compromised from within by the powers who have been given a lesser role to play than they believe is their due? Will the new structure be able to deal with some of the area-specific problems such as the rise of extremism in the Islamic world that threatens world peace and prosperity or is it important to add to it some side structures?

As suggested in an earlier article, one important component of the developing global structure is the evolving relationship among four countries: China, India, Pakistan and the United States. Three of these countries are in Asia, the fourth is still the only superpower in the global economic and political systems. Three of these countries are among the five largest economies in the world.

Two of them — China and India — are by far the most rapidly growing large economies in the world. They are also the only two countries in the world with populations of more than a billion people each. Given that, why should Pakistan, an underperforming part of the developing world and a country beset with seemingly intractable economic problems, be included among the other three to define a quadrilateral relationship? This is a fair question to ask and one not too difficult to answer.

For a number of reasons, some of them related to the several models of economic development pursued by Pakistan over the last several decades, the country has created an environment that encourages a significant number of youth in its very young population to adopt extremist ideologies as a way of leading their lives. In 2009, extremism and associated acts of terrorisms took a heavy toll on the economy. There was also a heavy loss of life: more than 600 people were killed in the last three months of the year in dozens of terrorist acts attributed to the activities of extremist groups, especially the Tehrik-i-Taliban Pakistan.

The rise in terrorist activity can be attributed to economic failure especially the inability of the economy to create jobs for the young in the more backward areas of the country. There is a fear that if Pakistan’s economic situation continues to deteriorate it could have adverse consequences not only for the country but also far beyond its borders. One reason for thinking in terms of an arrangement encompassing these four countries is to pull back Pakistan from the abyss towards which it seems to be headed.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Which way are commodities heading?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 25 Jan, 2010[/B]

RECALLING what happened to the economy in 2008-09 when a number of commodities important for the country saw their prices go through the roof, it is a good time to reflect on which way commodity markets are heading in the next few months.

Could a rise in commodity prices – the price of oil, for instance, has increased significantly in the last few months – could hurt the recovery that is taking place? Expert opinion is mixed on the question of the future of commodity prices. But one thing is clear. The way the global economy has begun to recover from the Great Recession of 2008-09 will have a profound impact on the behaviour of commodities in the later months of 2010 and in 2011.

The major difference between the recovery now underway and those that occurred after the previous recessions is that the engine of global growth is no longer the United States. This time it is China. When the United States led recoveries from recessions, it was the consumer that provided the fuel the distressed economies needed.

When the recovery begins with China it is led by investment, most of it provoked by the funding provided by the government. Private consumption is the largest single contributor to the American national product. In China it is investment. The products the American consumers demand have a very different commodity content compared to the products needed by the Chinese investors. In other words the price pressures that will appear during this period of recovery will be different from those that were felt in the previous recoveries.

Some years ago Alan Greenspan, the long-serving chairman of the Federal Reserve Bank, the American central bank, said that his country’s product was getting lighter. By that he meant that the commodity content of American output was declining while the contribution of “weightless” knowledge was increasing. This meant that when the rate of American GDP began to increase, the demand for physical commodities did not rise by as much as was the case in earlier growth spurts.

The situation is very different in emerging markets such as China and India that are now leading the way in the current recovery. The revival of the Chinese economy was helped by a large government stimulus package which was aimed at increasing the investment in physical infrastructure. To take one example: when American consumers go shopping after taking some rest during a period of recession they tend to spend money on electronic appliances that need sophisticated chips that have very little physical material embedded in them. There is not much metal content in IPhones. For devices such as these knowledge is the main component in their manufacture.

On the other hand, when the Chinese begin to spend money on building roads, railways, ports and airports as they are doing now the demand for different types of inputs goes up. Heavy machinery is needed as are cement, steel, copper and other materials that go into construction. In this recovery one will, therefore, see much greater impact on the prices of the commodities that the Chinese economy requires compared to those that the rich countries need.

Another significant change is occurring in the pattern of commodity consumption in the mature economies of the developed world comparing to those that are in the early phases of development. Input of energy per unit of output in the rich world is much lower than in the developing world. In other words, when global growth is the result mostly of the increased activity in developing countries, we can expect the demand for energy to increase more rapidly than was the case when recovery was led by industrial nations.

According to Goldman Sachs, the investment bank that coined the term “BRICS” to lump to together Brazil. Russia, India and China, these four emerging economies contributed almost 30 per cent to global growth in dollar terms between 2000 and 2007 and 45 per cent since the crisis began in 2007. This means a 50 per cent higher contribution by these four countries to global growth in the post-recovery period compared to the pre-recovery period.

There is one other reason why we should expect a significant impact on commodity prices as economic recovery takes hold this time around. Most countries that have used public policy intelligently to revive growth have ensured that the poor will not be left behind in the process. All large emerging economies, Pakistan included, have made sizeable public sector contribution to either providing increased employment opportunities to the poor or providing them with direct income support. China did the former; Pakistan the latter. India followed both approaches. The poor spend a much larger proportion of their income on food; therefore, when their incomes increase, the aggregate demand for food increases significantly. This will put pressure on food prices.

Finally, there is the matter of extensive drought this year in South Asia. Whether this is part of the changing climate pattern because of global warming is hard to say. Nevertheless, decline in the output of some of the winter crops in South Asia will have significant consequence for food prices. What are troubling for Pakistan are some of the trends relating to wheat production in the United States. Wheat is Pakistan’s staple food crop. US winter wheat plantings are likely to drop to their lowest levels in almost a century, forecast at 37.097m acres, 14 per cent down from the previous year. There is likelihood that wheat prices will rise because of the reduced plantings in America. If the drought affects the availability of water for wheat in this season, Pakistan may have to return to the world market for large purchases at a time of rising prices. This will once again put a great deal of pressure on the balance of payments.

As already indicated above, oil prices have begun to increase. They are now above $82 a barrel for February deliveries and may rise further although the OPEC has declared its intention of keeping them in the $75-80 range. Even in that range the pressure on the country’s balance of payments will be considerable.

The conclusion I would reach from this is obvious. Islamabad’s policymakers have done reasonably well in the last few months in bringing the rapid economic plunge of 2008-09 to an end. Signs of recovery have begun to appear but that is happening at a time that commodity prices have come under considerable pressure once again. If they rise sharply, the impact on the incipient recovery will be considerable.

The most important thing Islamabad can do at this time is to keep a careful watch on what happens to the international commodity markets as well what is likely to be the impact on agricultural output for the current season’s crops. If it is anticipated that domestic output will be less than expected and commodity prices seem set to rise, there may be reason to take some defensive operations in the forward markets.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Obama’s changing tone[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 26 Jan, 2010[/B]

What has given such prominence to a string of insurgencies at this time is the fact that some non-state actors belonging to the Islamic faith have decided to challenge the West, the US in particular, by using the weapon of terrorism.

The initial response of the US to the problem was to employ force to defeat the Islamic extremists threatening its interests. This was called the ‘shock and awe’ approach that envisaged using military power against an essentially primitive enemy to obtain its submission.

This was largely the strategy followed by the administration of President George W. Bush until the final year of his tenure. Then, under the influence of Gen David Petraeus, who was responsible for developing the US counter-insurgency strategy, the Bush administration changed its course in Iraq by combining economic and political development with force to beat back the insurgents. The strategy seems to have worked. The level of violence in Iraq has subsided significantly; December 2009 was the first month since March 2003 when the US went into Iraq that the Americans did not lose a single soldier in the conflict.

Whether the same strategy should be adopted in Afghanistan, the other area of insurgent activities, is a question that was debated for four months between August and November 2009 by the senior officials of the US administration including President Barack Obama.

The latter had taken office convinced that part of the problem was a widespread impression among Muslim populations around the globe that the Americans were fighting a war against Islam. Early on in his tenure he decided to address this issue head-on. In a major address aimed at the world’s Muslims and delivered before an audience in Cairo he said: “I have come here to Cairo to seek a new beginning between the United States and Muslims around the world, one based on mutual interest and respect.”

He promised that he would build bridges between his country and the world of Islam. He wanted the Muslims to recognise that the fight against those who were committing acts of terrorism was not just America’s war or the war being waged by the West, but it was also their war. He did not wish the people in his own administration to lose sight of this fact as he prepared to define a new strategy to beat back the insurgents operating from the secured havens in the mountainous regions on the border between Afghanistan and Pakistan.

Last year, Gen Stanley McChrystal, the commander of the US forces in Afghanistan, sent in a request for 40,000 additional troops to the president. The general wanted the kind of troop surge in Afghanistan that appeared to have brought relative peace in Iraq. After an intensive discussion, led by the president, it was announced that there would be 30,000 more troops for Afghanistan. But Obama also said that he would begin the process of withdrawal of the American contingent from July 2011.

All these developments have seriously affected Pakistan which had already seen a build-up in Islamic extremism. However, just as the administration had convinced itself that it had found a way and justification for combining strong military action against the extremists with a serious development effort, the situation was complicated by a Nigerian man’s attempt to blow up an American airliner on Christmas day 2009. It was revealed that he had received training in Yemen from the Al Qaeda in the Arabian Peninsula (AQAP).

Preceding this act was the attack by a Muslim doctor, a psychiatrist, on his fellow workers at Fort Hood in Texas in which 14 people were killed. It was revealed that the doctor was also in email contact with a Yemeni imam. Under pressure from his critics who were troubled by the new president’s focus not on the use of force alone but to combine force with other types of efforts, Obama seems to be shifting his ground. He has begun to use a language resembling that of his predecessor. “We are at war against Al Qaeda and we will do whatever it takes to defeat them,” he declared, after the botched bombing attempt.

Some of those who had supported Obama in his quest for the presidency are troubled by the direction the new president is taking under the pressure of events. “Even as he fights Al Qaeda and its allies, Obama needs to be Obama. He needs to continue voicing the Cairo message of outreach to the Muslim world — not as an alternative to battling extremism but as a necessary component to that fight,” wrote syndicated columnist David Ignatius recently. “We are confronting an enemy that wants us to draw deeper into battle, so that America is more isolated and unpopular. We avoid the spider’s trap by resolving the problems that matter.”

The main hypothesis to be tested by the evolving American approach is the role of economics in producing despair among certain groups of people and to persuade them to challenge the authority of the state. If this is indeed the case it will have a profound impact on the design of public policy.

A good part of the debate in the US as President Barack Obama was deciding on a strategy to fight the Islamic militants operating in the border areas of Afghanistan and Pakistan was concerned with giving more weight to economic development in winning the war against the extremists. If economic deprivation was a powerful reason for the extremists to fight the West and simultaneously the Afghan and Pakistani states then that is where the bulk of the effort has to go.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Development options[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 01 Feb, 2010[/B]

THE global economy appears to be recovering from what is now called the “Great Recession”. The recovery is led by some of the large Asian economies, most notably China and also India. The Chinese economy is estimated to have increased by 8.7 per cent in 2009 and is likely to expand by 9.5 per cent in 2010. India will probably produce an impressive rate of GDP increase in 2009-10, close to seven per cent.
Indonesia, the third largest Asian nation by population, has shaken off the economic and political blues and is also making a contribution to Asia’s recovery. Pakistan, the fourth largest country, is the sick man of Asia. Why it has done so poorly is a subject on which many (including myself) have written; what it should be doing in order to get out of the mess in which it finds itself is a question worth some thought. In this context one thing is clear. The strategy it adopts must be based on an understanding of how Asia is recovering and how that recovery should influence development thinking in Islamabad.

The Asian model of growth was based on a number of assumptions which were made when some parts of the continent began the process of economic take-off. Some of these are no longer relevant for today’s world.

The old model was founded on four pillars. One, domestic markets were too small to support large industrial sectors. This meant that markets had to be found through exports. There was almost an insatiable appetite for Asian products in the markets of the United States in particular but also Western Europe. The Asians first exported simple labour intensive products. Gradually they climbed the production ladder and began to export such sophisticated products as automobiles. Several Asian countries are now moving towards trading in knowledge-intensive output.

Two, to develop a large industrial base, the Asians needed to invest a significant proportion of their gross domestic product. They decided that domestic savings must be the source of this investment even if it meant that consumption by the present generation had to be postponed.

Three, the industrial sector must be kept competitive by maintaining an exchange rate that remained below the level the markets would set.

Four, to protect the type of crisis that hit the Asian region in 1997, countries must maintain large external accounts reserves.

None of these pillars were built to support the Pakistani economy. It was erected instead on a shaky ground. Industrialisation was prompted largely by the Indian decision taken in 1949 to impose a trade embargo on Pakistan. Consequently the satisfaction of the domestic demand remained the overriding concern but it was not large enough to support large-scale industries. There was, therefore, concentration on establishing small industries producing products for domestic consumers.

Investment was financed mostly from foreign capital flows. Most of these came in as aid and not as foreign direct investment. For the last couple of decades, the exchange rate was overvalued which kept imports cheap while reducing the ability for the country to compete with some of its Asian neighbours in the few markets that were available to sell the few products produced in excess of domestic demand. And, foreign exchange reserves were not built up to cushion the country from adverse developments outside its borders.

Because of these public policy failures, the country today has an economic structure that is not ready for a rapid growth of its economy. A great deal of restructuring is needed to ready it for joining other high performing Asian nations. But in order to undertake that restructuring, there will have to be the political will to bring about change. There is little evidence that such will exists at this critical time in the country’s troubled history.

The global economy is now structured very differently from what it was when other high performing Asian economies performed their “miracles”. Developed countries that provided the markets that fed the industrialisation of these states have entered a period of slow expansion.

In the coming years the fastest growing markets will be in Pakistan’s neighbourhood, not in distant Europe, not even in the more distant North America. The sources of foreign capital flows are also shifting away to the surplus economies of Asia and the Middle East and these sources will be looking for high returns on capital than Pakistan could promise in the current situation of insecurity.

There has, therefore, to be even greater reliance on domestic savings than was the case when Pakistan could trade-off its geo-political situation for official development assistance. All this calls for a very different approach to economic development. Investment must be financed mostly from domestic savings.

This will need a number of structural changes in fiscal policy. To begin with, the authorities must expand the tax base, a goal which has been on the agenda for a long time but has contin ued to elude the policymakers. The lobbies that are against such a move have succeeded in preventing appropriate action to reach the goal.

Today the country with less than 10 per cent has one of the lowest tax-toGDP ratios in the developing world. It will also mean introducing more income-elastic tax instruments. The value added tax is the most obvious of these. The VAT should have very few exemptions and should cover all sectors of the economy. Such a programme of structural change will also require considerable fiscal decentralisation so that taxes are collected by the governments that are not too distant from those who pay them. This will result in greater accountability of the government collecting taxes by the people for whom tax revenues should be mostly used.

International trade must become the driver of growth but it will have to be directed towards Asia rather than the present developed countries. This is one reason why it is so necessary to work out better economic relations with India and to take greater advantage of the proximity of China, now the world’s most dynamic economy. Pakistan needs both a China strategy and an India strategy. In both cases an effort should be made to develop strong strategic linkages between Pakistan’s private sector and those in China and India. A strategic relationship implies division of work between the producers in Pakistan and those in the two neighbuoring countries. Pakistan could, for instance, become a supplier of parts and components to the rapidly developing automobile industries in China and India.

By opening the Pakistani territory more freely to transit trade to and from China and India, the country would be able to significantly change the structure of its economy. Modern services would become considerably more important contributors to the country gross domestic product than, for instance, large scale manufacturing. This has been a contentious issue.

Many in Pakistan believe that by giving transiting rights to India for trading with Afghanistan and Central Asia – perhaps also with China and the Middle East – the country will be taking its hands off the one lever it can use to influence policy making in New Delhi. I have always found that argument difficult to buy. In fact, there would be greater leverage if Pakistan were to become the hub of trade between India and the countries to the north.

Given the rapid changes occurring in the global economy of which Pakistan must attempt to become a larger player, the country must carefully reflect on the strategy it must put in place to catch up with the rest of Asia.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Our population problem[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 02 Feb, 2010[/B]

IN the 1960s President Ayub Khan made population growth a major policy concern for his development-minded administration. However, since then policymakers have not given the subject of population the attention it deserves.

That is unfortunate since the dynamics associated with population growth varies according to the location of people, the patterns of migration and differences among various areas. It has had a profound impact on the way the country has developed — and not just economically.

Demography has also had a profound impact on Pakistan’s political and economic development. Today I will look at some of the broad trends in Pakistan over the past six decades, look at the way population trends are shaping globally, and see how these world trends relate to Pakistan.

When Pakistan became independent in 1947 its population was estimated at 32 million. Sixty-three years later it has increased 5.3 times to 170 million. This implies an average annual rate of growth of 2.74 per cent, one of the highest in the world. The government claims that the rate of increase has been declining in recent years and is now below two per cent, possibly no more than 1.8 per cent a year.

In 1947, only 10 per cent of the population lived in urban areas; today the figure is about 50 per cent. This means that the size of the urban population has increased 26.5 times, again one of the highest rates of growth — 5.4 per cent a year. About a third of the urban population resides in two large cities, Karachi and Lahore. As is the case with the rest of the developing world, the rate of increase in the populations of large cities in Pakistan will also decline while those of the secondary and tertiary cities will increase.

This brings me to the question of global trends. It is useful to reflect on these in order to comprehend the challenges Pakistan’s policymakers face and will do so in the future as they begin to focus on the impact of demography.

The UN’s population division now projects that world population growth will almost come to a standstill by 2050. At that time the global population will stabilise at 9.15 billion compared to the present 6.83 billion. This levelling in the rate of increase was not anticipated a couple of decades ago. In the 1980s, for instance, demographers worried about what they had begun to call the population bomb. The bomb did not explode in most parts of the developing world. That said, there is now a new worry — the distribution worldwide of the anticipated growth. The new generation of demographers has now begun to point to some population trends that could produce a great deal of economic, political and social instability.

Almost the entire growth in the world population of 2.32 billion will occur in the developing world. By the middle of this century the share of today’s rich countries will decline to only 12 per cent of the total, five percentage points lower than was the case at the beginning of the century. It is not always recognised that this is a significant reversal of past tends. At the start of the 18th century, Europe accounted for 20 per cent of the world’s population.

The advent of the industrial revolution in Britain resulted in an explosion of its population as health and sanitation facilities improved and the rates of mortality declined. In 1913, on the eve of the First World War, Europe had a population larger than that of China at that time. By that time the proportion of Europe in the context of the global population had increased to 33 per cent of the total. However, the continent was getting too crowded. There were serious food shortages in some parts; Ireland suffered what came to be known as the potato famine. In migration, the Europeans found a solution to their population problem. There was a massive movement of people to North America and Australia.

There will be other significant changes in the distribution of the population. Not only will today’s developed countries have a significantly lower proportion of the total population, their populations will also be much older and the proportion of non-working to working populations will increase considerably. Will the burden of looking after older people fall mostly on the young or will the state step in to help? If it is the latter, how will the state pay for the care of the poor? These have already become important policy issues in developed countries.

By the middle of the century more than half the global population will live in towns and cities. Most of the increase in urban populations will take place in the large- and medium-sized cities in the developing world. Even at this time these cities are proving hard to manage. Neither they nor the states in which they are located have the means to provide some of the essential services people need. In many of them security is a major concern. Today some 90 per cent of global homicides are committed in the urban areas of the developing world.

There will also be significant demographic shifts within the developing world. Populations in Muslim countries will increase much more rapidly than in other parts. As Jack A. Goldstein says in his article, ‘The new population bomb’, in a recent issue of Foreign Affairs, “most of the world’s expected population will increasingly be concentrated in today’s poorest, youngest and most heavily Muslim countries which have lack of quality education, capital and employment opportunities”. He probably had Pakistan in mind when he wrote that sentence. But the option of migration is increasingly less available to the crowded Muslim world as was the case for the Europeans 100 years ago.

This then is the context in which we should look at our demographic situation. We are engaged in a race: either develop the economy rapidly so that opportunities are created for the young or fumble with the economy and let the youth turn increasingly towards extremism.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Global economy after the Great Recession[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 08 Feb, 2010[/B]

MOST large economies posted respectable growth numbers for the fourth quarter of 2009. The United States saw its GDP increase by 5.4 per cent on annualised basis in the quarter ending December 31, 2009. The increase was much more than expected by most experts.
The Chinese economy expanded by 10.7 per cent, again more than anticipated. Even European economies have begun to show some signs of life. What is now called the Great Recession seems finally over, having taken a heavy economic toll across the globe. In what shape has it left behind the global economy?

Perhaps the greatest consequence is on the conceptual front. The previous consensus on how to manage economies, global as well as national, was wrong. It was called The Washington Consensus. There was the assumption that the best way to take care of the world economy was to leave it alone. This is what was meant by “globalisation”. The enormous increase in global output and trade over the previous 30 years was the result of removing barriers to trade and capital flows. This was also the period that saw the largest reduction in the levels of global poverty even though it may have increased the income gap between poor and rich nations.

There are, in fact, three consequences of the Great Recession of which all policy makers, no matter where they are located, should be mindful. One, while the world is linked by different types of flows – capital, trade and that of people – these links need to be tended. This is particularly the case in the sector of finance where most large firms operate across national borders.

Two, private initiative is important and what is loosely described as “capitalism” should be the guiding philosophy for all nations, developed and developing. That notwithstanding, activities of private operators in the economy should be kept under constant observation so that they don’t do social harm.

Three, the world is being reshaped with the centre of economic activity moving from the Atlantic to the Pacific. This will have enormous implications for all world economies.

The collapse of financial and capital markets all over the world after the demise of Lehman Brothers in the United States showed that governments could not stand by and let the markets take care of themselves. They had to intervene. The recently published biography of Hank Paulson, the US Secretary of Treasury at that time, reveals how close the world economy was in September 2008 to a total meltdown.

Led by the United States, governments intervened massively in both developed and developing countries. Washington provided tens of billions dollars each to several financial institutions that were near collapse. That help kept institutions such as Citibank, Bank of America, and Goldman Sachs afloat. The governments also realised that much of what John Keynes, the British economist, had said about macroeconomic management and the role of the state was correct. The United States and China launched stimulus programmes that had no historical peace-time precedence in terms of their size.The IMF was given additional resources to help the countries in acute distress. Pakistan was among the countries that were assisted.

It is also now recognised that the state has to play a much larger role in managing the domestic economy and the assumption that financial markets are selfcorrecting was deeply flawed. Under Alan Greenspan, who served for nearly two decades as chairman of the US Federal Reserve, the American central bank, the belief that even regulation could be left to the markets had become popular not only in the Anglo-Saxon world. It was also the basis of economic policy making in Islamabad during the period of President Pervez Musharraf. Islamabad under Musharraf left the private sector mostly alone. Even the regulatory agencies that had the power to watch over the private sector were defanged. The Competition Commission, although led by a strong chairman, was not encouraged to prevent monopolistic behaviour by large firms. The result was that significant shares of the market were captured by a few producers manufacturing some critical commodities.

The Great Recession seems to have quickened the pace at which global output was being distributed across the globe. China is expected to overtake Japan as the world’s second largest economy. It has already become the world’s largest trading nation. It is now the world’s largest market for automobiles. That the centre of gravity of the global economy was moving from the Atlantic to the Pacific seemed a far-fetched assumption a few years ago. It has become a reality.

In the next one decade, almost twothirds of the increase in world output will come from the emerging economies. Not too long ago, policy makers in the developing world – including those from Pakistan – focused on their relations with the rich western nations to ensure that they had adequate availability of financial resources and access to the markets of rich countries in order to promote domestic economic development. Pakistan has spent a great deal of time and effort in cultivating the United States as a supplier of much needed external capital flows. It has also sought to improve access to the markets in the United States to improve its export earnings. That strategy has to be rethought.

The Great Recession, therefore, has left the global economy in a very different shape from the one that existed before it took hold. Those policy makers who have sharp instincts will be able to draw for their countries the benefits that these changes can provide. Islamabad needs to do at least three things. It must develop a strategy to strengthen the institutions of economic management. There has been weakening of the state over many decades. That has to be arrested. This will involve movement on several fronts: civil service reform, redesign of the fiscal system, reform of the regulatory system, greater autonomy to the provinces. These are some of the areas that need immediate and thoughtful attention.

What will be more difficult for Islamabad is to ensure that it would not be completely left out of the emerging international system of global economic management. At this time, Pakistan has no presence in G20; a very weak voice in the boards of the IMF and the World Bank; little say in matters such as international trade, international migration and climate change; weak links with the more rapidly growing economies of Asia. All these subjects are of great importance for the country but they are being left largely unmanaged.

It is the rise of China that Pakistan must study and understand in order to draw full benefit from the fact that this rising global economic power sits right across its borders. This relationship has not been neglected; there is a constant flow of officialdom from both sides across the border. The problem, however, is that all this energy is being applied without a well thought out strategy.

To begin with Islamabad would do well to establish an inter-ministerial group tasked to oversee the development of economic relations between Pakistan and China. This group should be ideally headed by a person who has the rank of a federal minister so that its deliberations and actions are kept under review by senior politicians. I have proposed on several occasions that Pakistan needs a China strategy to benefit from the reshaping of the global economy.

[U][B][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]A small victory[/FONT][/SIZE][/COLOR][/CENTER][/B][/U]

[B]By Shahid Javed Burki
Tuesday, 09 Feb, 2010[/B]

THE recent conference in London to chart the future course for Afghanistan produced a small victory for Pakistan. Islamabad had insisted for many years that a long-term, stable solution to the 30-year-old Afghan problem could only be found if some of those identifying themselves with the Taliban movement were accommodated within the governing structure.

This position was first advanced by Gen Pervez Musharraf and followed by the present government. The Americans, however, would not have anything to do with anybody who went under the banner of the Taliban movement. But then an interesting thing happened. The Taliban emerged as different groups, each with its own agenda.

At least three major Taliban groups emerged. The first was the group headed by Mullah Omar who had led the government the Taliban had formed in Kabul in the mid-1990s. It is widely believed that this group was led by leaders of the ‘Quetta shura’ whose main goal is said to be to bring Afghanistan under the control of the Taliban. That could happen only if the Americans were made to leave Afghanistan. The bulk of support for this group came from the many local commanders involved in various insurgencies in Afghanistan.

The second group was led initially by Jalaluddin Haqqani and is now under the control of his son Sirajuddin. The older Haqqani had been helped by the Americans, the Saudis and the Pakistanis to fight the Soviet occupation of Afghanistan. Having achieved that objective they were unable to work together to govern the liberated country, paving the way for the Taliban regime.

When the Americans moved into Afghanistan in late 2001 and pushed the Taliban out of Kabul, the Haqqani group shifted to Pakistan’s North Waziristan. It has remained there, supporting the insurgents in the areas adjoining their sanctuary in Pakistan. Since the senior Haqqani had served in Mullah Omar’s government his Taliban movement retained some contacts with the Quetta shura. But the linkages are believed not to be strong.

The third group had little to do with the insurgency in Afghanistan but wanted to bring about change in Pakistan. It was formed out of several small tribal groups and was given the name of Tehrik-i-Taliban Pakistan (TTP). Initially led by Baitullah Mehsud who was killed last year in a drone attack, the TTP quickly expanded its reach.

Last summer its affiliate in Swat took over the district and advanced into Buner. They were only a short distance away from Islamabad. It was then that the army moved to reclaim the areas, carrying out a successful operation. It followed it up with an equally successful operation in South Waziristan. Recently, newspapers carried the story that Hakimullah Mehsud, Baitullah’s successor, had died of injuries sustained in a drone attack sometime earlier.

While Pakistan drew a sharp distinction between these three groups, the Americans were of the view that all of them had to be treated the same way. They were pleased with Pakistan’s move against the TTP in Swat, Buner and South Waziristan but were unhappy that Islamabad was not anxious to go into North Waziristan against the Haqqani group or to hit the Quetta shura.

Neither of the two groups had launched attacks against Pakistan while the TTP was involved in many terrorist activities that had killed hundreds of people in various parts of Pakistan. Also, Islamabad, worried about the political vacuum that might occur once the Americans and Nato forces began the promised withdrawal from Afghanistan. It wanted a situation where it could depend on these two groups of Taliban to help establish a regime in Kabul that would be friendlier towards it than the one headed by President Hamid Karzai.

What motivated the Afghan president to dispense with his enduring antipathy towards the Taliban movement to hold out an olive branch to some of them in London?

In fact, Karzai and his associates went to London to get the support of the countries assembled there to help him win over those in the Taliban movement who were its foot soldiers for economic reasons and not out of ideological compulsions. His finance minister asked for assistance amounting to $1.2bn, with $200m dispersed immediately so that employment opportunities could be created for these people. The regime held out the assurance that this money would not be used to bribe the Taliban but for promoting development.

This, in fact, is a recognition by Karzai that an important reason for his mounting troubles was of the poor governance of Pakhtun areas, most of which border Pakistan. The president was also thinking of the time when the Americans would not be present in large numbers to prop up his administration. The time had come for him to bring under his tent those Pakhtuns who were prepared to work with him.

While the outcome of the London conference vindicates Pakistan’s long-held position, it also points to the importance of focusing on economic development as a way of countering insurgency. It is important for Pakistan to launch a massive programme for the development initially of Malakand division and South Waziristan — two areas where the army has scored impressive successes — in order to ensure that the people there remain loyal to the Pakistani state.

A well-articulated programme of economic development will have the support of the West and should not impose a heavy financial burden on Islamabad. This is a good time to start work on it.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]History’s influence on public policy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 15 Feb, 2010[/B]

ALMOST half a century ago when I was a graduate student at Harvard University, I learned why it was important to understand the influence of history on the making of public policy. I was taught then by Alexander Gerschenkron — by far the best known and widely read economic historian of our times.

He took me under his wing and instructed me how to study economic history and how to apply that study to the working of the state in the design of public policy.

According to him, the important question about the working of the state was not only to ask what needed to be done at a given point in time to improve the economic and social conditions of the citizenry. It was equally important to ask the question why certain things were done by the state in the past.

Choices the makers of public policy make at any given time are the result of their understanding of the situation they are addressing as well as the consequence of the influences under which they are working. What I learnt from the master economic historian then is as relevant today as it was when he did his pioneering work.

The problems Pakistan’s policy makers confront today are well known – in fact they have been known for a long time. The economy is in deep trouble now for many reasons. Among them the following four are particularly important.

First, the country is excessively dependent on external capital flows, having failed to raise resources from within the economy to finance needed investment. This dependence has created extreme volatility in the performance of the economy. The economy does well when foreign flows are large; it does poorly when these flows decline. This dependence has also subordinated Pakistan’s relations to the outside world to the need for financing the economy.

Second, Pakistan remains poorly integrated with the global economic system. It has failed to take advantage of the opportunities globalisation has opened up for emerging economies such as Pakistan.

Third, the country has not developed its large human resource. Pakistan today has one of the youngest populations in the world with the median age of only 18.2 years. This means that one-half of its population of 170 million is below that age. A significant proportion of the young is illiterate and, consequently, does not have the skills needed to participate in the modern sectors of the economy where wages and hence incomes are high. Being uncertain about their future, a large number of young people have been attracted to extremist causes. For many the likely economic rate of return from participation in these activities is higher from what they view is on offer from the economy.

Fourth, Pakistan has one of the most centralised systems of policy making among the countries of its size. The state is very distant from the people it must serve. One reason why the state operates in such a centralised manner is that it was dominated for a long period of time by the military which believes in a strong command and control system.

How should this situation be addressed? How should Pakistan raise more domestic resources to finance investment, get better integrated with the global economy, spend more on human development, and give more authority to the sub-national governments? In other words, the state should function very differently from the way it did in the past. This leads to the question Gerschenkron would ask: why is the Pakistani state behaving the way it does? We turn to history to answer the last question.

India and Pakistan emerged as independent states with the support of significant proportion of the populations that became the citizens of the two countries. The leaders of the two movements that created these two countries won mass backing having promised that the states they wished to create would better the lives of their citizenries. But this is where the similarity between the two movements ends.

The senior leaders of the Indian National Congress had clear ideas about the way the state should function to increase citizen’s welfare. Mahatma Gandhi believed in self -reliance and rule by the people in a highly decentralised system. Jawaharlal Nehru wanted a powerful state operating from the centre and occupying the commanding heights of the economy. Had Gandhi lived there would have been considerable tension between these two points of view.

After his assassination in January 1948, the ground was clear for Nehru to work for the realisation of his vision. The result was the “license raj” that produced the “Hindu rate of growth” for 40 years after the country achieved independence. The rate of increase in the Indian national income during this time was about 3.5 per cent a year, one half of the average for the following two decades and two-thirds of that for Pakistan during the same period.

In the case of Pakistan, once the Muslim League had created a state for the Muslims of British India, it had no idea how that state should function to increase the welfare of the citizenry. There was an ideological vacuum in so far as giving direction to the making of economic policy was concerned. This meant wide swings in the way the economy was managed.

Looking back at the way the policymakers designed economic strategies, we notice four broad trends. After the confusion that prevailed in the first decade after independence, General Ayub Khan, the first military president, was persuaded by a group of technocrats to opt for an economic strategy that focused on growth with considerable space assigned to private initiative. The result was a sharp pick up in the rate of GDP growth accompanied by an increase in regional and personal income disparities. This strategy led to the rise of the Pakistan People’s Party and the eventual separation of East Pakistan.

Under Zulfikar Ali Bhutto, the PPP implemented an economic agenda that was Nehruvian in content and scope.

The role of the state was radically changed and enhanced while the large private sector was punished through a series of nationalisations. Economic growth slowed down and the incidence of poverty increased. The turmoil that ensued bought the third military government in office that tinkered at the margin to introduce Islamic economic principles into the management of the economy.

The fourth ideological shift came with the first administration of Prime Minister Nawaz Sharif (1990-93) to occupy office. It once again placed its faith in the private sector and adopted some of the more important elements from the strategy that was known as The Washington Consensus. This approach was kept in place by the military administration headed by General Pervez Musharraf.

The return of democracy in 2008 with the PPP governing from the centre and sharing power in Sindh while the Pakistan Muslim League is ruling Punjab has created another ideological vacuum in the making of economic policy.

The role of the state remains undefined as is the strategy that needs to be followed to put the country back on a sustainable trajectory of high rates of growth. What the present rulers need to do, therefore, is to first reckon how they wish to run the economy.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Talks based on economics[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 16 Feb, 2010[/B]

THERE has been a significant shift in the positions of most countries involved in the current Afghan conflict. The process started with President Barack Obama’s speech on Afghanistan last December.

Another important development has been the decision by New Delhi to give up its position that it would not talk to Pakistan on the resolution of issues souring ties unless Islamabad took to task those who masterminded the terrorist attack on Mumbai in November 2008.

On Feb 4, New Delhi proposed the resumption of talks at the foreign-secretary level but did not suggest an agenda. The response from Islamabad was quick. The Foreign Office spokesman said that if India dispensed “with its traditional inflexibility there [was] a possibility of moving ahead. Pakistan has always believed that it is only through genuine and meaningful talks that Pakistan and India can resolve their disputes”.

On the same day P. Chidambaram, India’s home minister, said in New Delhi that the handler of the group that penetrated Indian defences in the 2008 Mumbai attack may have been an Indian. “When we say he could be an Indian, he could be somebody who acquired Indian characteristics. He could have been infiltrated into India and lived here long enough to acquire an Indian accent, familiarity with Indian Hindi words…,” he said.

On Feb 5, Shahid Malik, Pakistan’s high commissioner in India, met Nirupama Rao, India’s foreign secretary, to discuss the timing and content of the high-level meeting between the two countries. “All possible issues which are of concern to Pakistan or India will be discussed,” he told the press after the meeting. “Kashmir is an issue we have been raising with India at every possible opportunity and forum. Terrorism will certainly be one of the areas of discussions because we have issues relating to terrorism and this is something that affects Pakistan.”

The news that India was prepared to restart its dialogue with Pakistan, begun in 2004 but suspended in 2008 after the Mumbai terrorist attack, was received in Pakistan with a mixture of relief and triumph. Most policymakers were of the view that the position Pakistan had taken following the Mumbai carnage had been vindicated. Its neighbour had begun to recognise that there was no official Pakistani involvement in the attacks.

The terrorist activity by the Tehrik-i-Taliban Pakistan in 2009 was a clear indication that Pakistan was also a victim of terrorism. Hundreds died in attacks on major cities and in several small towns in the NWFP.

The fact that there was some disagreement over the content of the dialogue once it began is a good indication of the nature of the relationship between these two countries. Even relatively minor issues became contentious. India initially indicated that it only wished to discuss terrorism while Pakistan wanted to go back to the composite dialogue which covered most contentious issues that had caused so much hostility between the two South Asian neighbours.

This may be a good time to completely change the framework within which India and Pakistan have been discussing their relations ever since 2004. Then, at the sidelines of a regional summit, Gen Pervez Musharraf and Indian Prime Minister Atal Behari Vajpayee had agreed that the two countries should attempt to resolve their differences through dialogue. In the context of the history of India-Pakistan relations this was a major breakthrough.

As was always the case, Islamabad wanted to focus on the issue of Kashmir. New Delhi was in favour of discussions that covered the many reasons for continuing tensions between the two countries. These included territorial issues other than Kashmir. For a number of years India and Pakistan had been fighting over the Siachen glacier in the eastern part of the disputed territory of Kashmir. There was also a dispute over Sir Creek on the western side between the two states. The Indians suggested that movements on these issues would build confidence and ultimately lead to the resolution of more difficult problems, including Kashmir.

The two countries are now debating once again the content of the dialogue expected to be resumed in late February. According to a newspaper report, the issue of what should be the right approach to the Indian initiative was discussed at a brainstorming session at the foreign affairs’ ministry in Islamabad where some concern was expressed that unless the composite dialogue was fully restored, Pakistan should not participate in the discussions.

However, the diplomats left the final decision to the politicians who, it was said, might be able to think outside the box to find a way to depart from the entrenched positions in the two bureaucracies. The Indian position dealt with terrorism as the main focus of discussions and Pakistan’s position was that the entire relationship should be on the discussion table.

If thinking outside the box is to be encouraged my suggestion would be that Islamabad should base the dialogue on an entirely new consideration: how to bring about greater economic integration between the two countries.

The objective should be to develop a stake for India in the Pakistani economy and also in its stability. This would entail a number of things including unhindered flow of trade between the two countries, encouraging the private sectors on either side of the border to invest in each other’s economy, the opening up of the border that separates the two parts of Kashmir to trade and movement of people, and grant of transit rights to each other for trade with third countries.

As the experience of Europe shows, economic integration among states with a history of hostility towards one another is a good way of easing tensions. Taking that approach would constitute real thinking outside the box.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Towards a new development paradigm [/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 22 Feb, 2010[/B]

THE current government has handled a difficult economic and financial situation. In the spring of 2008 it was clear that the country was heading towards an economic disaster. Urgent action was required and was taken by going to the IMF for resources to save the foreign exchange reserves from plunging to the point where the country would not have been able to service its external debt.

The Fund came to Islamabad’s rescue and in return for the commitment to stabilise the economy more than $11 billion were committed. This amount was to be disbursed over a period of 23 months.
The crisis passed, the decline in foreign exchange reserves was halted, the rate on inflation slowed down, the slide in the value of the shares listed on Karachi Stock Exchange stopped, and some investor confidence returned. With stability having been achieved, in which direction should the country move?

To answer this question, a group of business people, senior government officials and some representatives from the think tank community was established under my chairmanship in late 2008.. The group goes under the nomenclature of the Task Force for Private Sector Development. It has met four times and each time it has reported either to the president or the prime minister the substance of its deliberations. Its fourth meeting was held in Islamabad on February 12 and 13 and culminated with a briefing given to Prime Minister Yusuf Reza Gilani. We told the prime minister that the task force appreciated the fact that the government had decided to identify the private sector as the most important determinant of economic revival and growth.

In fact, the Planning Commission is looking to the task force to develop a policy framework that would help the private sector to contribute to the development of the economy. In the presentation made to the prime minister, a number of areas in which the government and the private sector needed to work together to achieve the desired result,. were identified.
The most important of these is the need to make the economy as self-reliant as possible. Over the last sixty years the economy has done well only when there was a large inflow of money from abroad. Self- reliance will only become possible if the government is able to raise more resources from within the economy rather than continue to rely on external capital flows.

In a presentation made to the task force, Finance Minister Shaukat Tarin pointed out that with the tax-to-GDP ratio having declined to about nine per cent, the entire development expenditure was being financed from foreign flows. Government’s revenues barely covered current, non-development expenditure.

The reason why Pakistan was doing so poorly was that the tax base was very small. This put a very heavy burden on the small number of people and entities that paid taxes. Given the narrow base, the incidence of tax on those that actually pay is very high. In view of this, the task force is recommending three things to the government. In reforming the tax structure, it should broaden the tax base. The most effective way of doing this is to move to towards a value added tax, lower the corporate rate and create a level playing field for all players in the economy.

Taxing the large enterprises in the formal sector, while allowing the small firms to escape the tax net, created a wrong set of incentives for asset owners in the private sector. This was one reason why the size distribution of the firm was skewed towards the very small firms. More than 90 per cent of industrial output was accounted for by the firms that employed less than 10 persons.

The task force has spent a fair amount of time in looking at the characteristics of the Pakistani firm. Using date available from the survey done by the World Bank in the context of its report, Investment Climate Assessment II, we concluded that the aim of industrial policy should be to increase the size of the firm, improve its technological base and make it more outward oriented. This will require the government to move on a number of fronts at the same time.

Labour laws need to be consolidated with the aim to protect the workers but at the same time reducing the visits to the firms by large number of regulators who seem more interested in collecting rents than in improving the conditions of workers. At the same the employers must have more flexibility in hiring workers and firing those that are performing poorly or have become redundant. The firms must also have ready access to land they need for their activities.

A matter that engaged the attention of the task force a great deal is the question of entry and exit of firms. Those countries that have done well in terms of developing their industrial base have made both processes less cumbersome. Pakistan is working on creating a mechanism for allowing firms to exit – to opt for bankruptcy if the condition so demands. The idea is to set up resolution trust corporations that will pick up non-performing assets, restructure them and dispose them off in the market.

We believe that a more effective and efficient way would be to develop a framework which would allow both debtors and creditors to work within a supervised institutional framework. The United States has such a system that works very well. It is called “Chapter 11 proceedings”. Something along those lines should be attempted in Pakistan.

Large firms are concerned about the non-availability of skilled workers. The educational base is poor. It does not place in the market workers with needed skills. Some of the firms that have successfully dealt with this problem have done so by training their workers themselves. This is costly and the firms believe that they should be given some incentives in this area. Some of the countries in East Asia that have done well, have allowed firms to write off some of the training expenses against taxes. However, this approach will add another subsidy to the many that various firms have been allowed over the years.

In approaching the question of accumulated subsidies, the task force has concluded that the government should produce a map that identifies, quantifies and estimates the cost to the economy of all the subsidies the private sector receives. This will help to rationalise them. We are also of the view that the government should publish in the form of a book all the SROs it has issued from time to time. These are aimed at specific industries or firms. Most of them create serious distortions in the system. The government should eliminate as many of these as possible. Such an exercise would also aim to create a level playing field for all firms.

Finally, we are of the view that the government should review all the economic laws that have accumulated on the books over time. Some of these don’t serve the purpose for which they were enacted in the first place. Their rationalisation will help to simplify the legal environment in which the firms are currently operating. Our main conclusion from this year-long exercise is that for the private sector to become a real driver of economic revival and growth the government will need to take a large number of required actions.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Economics & rule of law[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 23 Feb, 2010[/B]

THE main purpose of my latest visit to Pakistan this month was to chair the fourth meeting of the task force on private-sector development set up in November 2008 at the urging of President Asif Zardari.

As chairman, I was asked to present to the government ideas on how Pakistan’s private sector could be commissioned not only to revive the economy but to set it on the path of sustainable, high-level growth. It is the government’s hope that it can institute economic and social reforms to make it possible for Pakistan to attain the sort of GDP growth that has become common in Asia.

It was on the second and final day of our deliberations that Pakistan was convulsed by another crisis that had its origin in the continuing conflict between the executive and judicial branches of the government. The private-sector members of the task force commented on this development on the sidelines of our meeting. They were unanimous in their view that one of the factors standing in the way of development of the private sector was the weak legal and judicial system. They felt that it would remain weak for as long as its role was not clearly defined. This would require our political and legal systems to come to an understanding.

For some time now development economists at institutions such as the World Bank and the Asian Development Bank (ADB) have been analysing the relationship between the efficiency of the legal system and performance of the economy. Recognising the importance of a well-functioning legal and judicial system the ADB some years ago funded a large programme for judicial reform in Pakistan. The programme has not done well since it appears that it did not have the full support of the various parts of the executive.

Development economists who have explored the relationship between law and economics have reached several conclusions. Two are worth noting. The first is that a well-functioning legal system is an important contributor to economic growth and social improvement. Those who wish to invest in an economy find comfort in a well-functioning legal system. Such a system not only has institutional mechanisms for dispute resolution, it also creates an environment of certainty that assures investors that they will not be surprised by ad hoc and whimsical decisions by the executive.

Common law that is the basis of the system in Pakistan functions by recognising precedence as equally important as formal laws. In the case of Pakistan the executive has shown considerable contempt for precedence. With frequent changes in administrations and changes in ideologies, those who operate in the field of economics have had to deal with a great deal of uncertainty. That is not good for the process of economic development.

The second conclusion reached by many development economists is that legal systems based on common law are better for economic development than those that follow fixed and unchanging codes. Examples of the latter are the Napoleonic and religious codes. The former is being followed in most of Europe and Latin America. This is one reason why the Anglo-Saxon world, as well as those parts of the world that came under its influence as a result of colonial expansion, are doing better in economic development compared to those following rigid legal systems. Common law systems provide flexibility while those based on codes are less open to accommodating change.

The changes made in the legal system by the administration of Gen Ziaul Haq have created systemic confusion. The addition of the Sharia bench has added an element of codification to the common law foundations laid down by the British during their long rule in India. However, the main issue at this point is the conflict between the executive and the judiciary on the extent of independence the latter will enjoy. This matter needs to be settled in a way that while the judiciary enjoys full autonomy in its operations, it should not encroach upon the working of the executive branch.

In a recent book, The Rule of Law, Lord Tom Bingham who held three of Britain’s great judicial offices, holds that the rule of law is the “the nearest thing we are likely to approach to a universal secular religion”. He maintains that the blessings for people who live under the rule of law can be clearer than those conferred by liberal democracy or free markets. In other words, in the three-legged systems — liberal democracy, open and competitive markets and the rule of law — that have been adopted by the more successful states around the globe adherence to the rule of law must be the strongest leg.

According to Bingham the rule of law has many elements. Among these are the accessibility of the law, equality before the law, the right to a fair and speedy trial, the legal accountability of the functionaries of state, accountability also of those who sit in judgment over other people, and the ability of the system to change as society changes and develops. It is evident that most of these elements are absent from the Pakistani legal and judicial systems as they are presently constituted. It is their absence that the ambitious programme launched by the ADB was seeking to address.

Looking at the current debate from the perspective of an economist I can only hope that some good will come out of the current confrontation between the executive and the judicial branches of government. If this leads to a clear demarcation we may see the evolution of a legal system that would create some certainty for the entrepreneurs who work in the markets and for common citizens who look to the markets to provide them with the goods and services they need at competitive prices.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Catch-up time for dynamic nations[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 01 Mar, 2010[/B]

THERE have been catch-up periods before in world economic history when a country that had lagged behind caught up with the leader, sometimes even overtaking it. This is exactly what we are seeing in East Asia.

There is a consensus among the experts who keep track of the relative economic performance of states across the globe that sometime soon – perhaps very soon – the Chinese economy, when measured at the prevailing rate of exchange, will overtake that of Japan and thus become the second largest in the world.

What will be the implication of this for the rest of Asia in particular for the countries that border on China?

In this context three things are worthy of note. The speed with which China has caught up with Japan was without historical precedence. It could happen given the large differences in the structural rates of growth of the two countries

What quickened the pace was Beijing’s response to the economic slowdown produced by what the economists now call the Great Recession of 2007-09. Beijing decided to invest huge amounts of public and bank money in the economy to stop it from slumping. The state provided $585 billion from the budget and encouraged the banks it controls to loosen the purse strings. The banks consequently gave $1,200 billon loans to industries, state and municipal governments and to consumers for purchasing cars and appliances. The result was that the economy bounced back growing at 8.7 per cent in 2009. A double digit rate of growth is expected in 2010.

Second, a significant amount of investment was made in improving physical infrastructure, in particular in the areas that were distant from the east coasts. In other words, the Chinese were using the opportunity created by the need to stimulate the economy to bring about more balanced growth in the country.

Third, from the perspective of a country such as Pakistan that borders on China, a considerable amount of public money went into improving physical connections between it and the neighboring countries. While investments are being made to improve the Karakoram Highway ( KKH), and improve China’s access to the port of Gwadar, the Chinese for the moment are focusing on improving their links with Southeast Asia.

For instance, the construction of a bridge has completed a road link between Kunming, the capital of Yunan province in the south, with Bangkok in Thailand. Another bridge linking Yunan with northern Vietnam is nearly complete. The airport at Kunming is being upgraded with an investment of $3.4 billion. All this activity is one province; other border province, including Xinxiang that is next to Pakistan is also receiving considerable attention.

What this demonstrates is that the authorities in Beijing are not simply throwing stimulus money where it can be absorbed easily and wherever jobs can be created – the Americans call this the “shovel” ready approach. In fact they are turning the need to stimulate into a geo-political opportunity. This is the major difference between their approach and the one followed by Japan. Largely because of the destruction the Japanese brought upon themselves as a result of the activist path pursued in the period leading up to the Second World War, Tokyo has very deliberately followed an insular approach.

A defeated nation tends to become passive and that is what happened to Japan once it signed the armistice treaty with the United States. Also, the Japanese were much more interested in creating markets for their products in the West, in particular in the United States. If the penetration of the western markets produced problems and it appeared that retaliatory action may be taken, Tokyo encouraged the private sector to locate factories where the markets were located. Japan thus became a major automobile manufacturer in the United States.

The Japanese kept an arms-length relationship with the developing world, including the countries in East Asia. The only way they engaged with developing countries was providing aid – an area in which they were more generous than most of the western states. Even here they let the lead to be taken by western aid givers.

When I looked after the World Bank’s China operations in 1987-94, they were happy to leave a great deal of policy advice to us. Also the Japanese were not interested in financing flashy projects with which the country’s name would be associated in the minds of the recipients. China, on the other hand, is happy to be identified with high profile projects. It is well known in Pakistan, for instance, that the Chasma nuclear plant was financed and built by China. China was also deeply involved in the construction of the port at Gwadar and the KKH. One of its companies has won the tender to build the extension of the motorway system to Multan.

In China, we have a very different player arriving at the scene. Having reached the international scene as a victor, it has vigorously pursued its regional and global interests. Some of what it is likely to do and has begun to do to is irking the United States and other western powers but Beijing is not likely to relent. That said, the Chinese are more likely to accommodate the interests of other countries than was sometimes the case with the United States and other major nations when western powers held unchallenged sway.

As China continues to grow its economy at very high rates, it is also restructuring it. Some of what is being done will have great meaning for a country such as Pakistan with which it has had warm and uninterrupted relations for over half a century.

The country is now engaged in a process of managed urbanisation that has no precedence in human history. It is planning to move hundreds of millions of people from the countryside to towns and cities. A large number of these will go to the already crowded urban belt that stretches from Dalian in the country’s north to Guangzhou in the south. They will live and work in high rise building. Since China is short of livable space it makes sense to go vertical. This is something that Singapore has done with great success.

People work in high rise buildings assembling imported components into finished products for export to foreign markets. The suppliers of these parts are all over Asia, particularly in the continent’s eastern part. This is where a country such as Pakistan has an opportunity. It could develop strategic alliances with manufacturers in China, supplying the parts and components they need. Even in the rapidly expanding automobile industry – last year the largest number of cars was sold in China – while the factories cannot go vertical, the manufacturers will rely on foreign suppliers for the parts that need a lot of space to produce.

China is also moving rapidly towards developing a knowledge-based economy, moving its workers from manual labour to the kind of labour that needs highly developed skills. However, this is being done by pursuing a strategy that is different from the one the Indians followed. The Indians went for the low hanging fruit concentrating on meeting the West’s need for back-office support. The Chinese on the other hand are moving simultaneously in developing and linking software development with the manufacture of hardware. This is one other area where a rising China could help Pakistan in developing a sector in which the country has the potential but has ignored it until recently.

Ties based on economics
 

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Ties based on economics[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 02 Mar, 2010[/B]

DURING my recent visit to Pakistan and in discussions with senior political leaders, civil servants and prominent business people I emphasised that it was important to use economics as the basis of renewed relations between Afghanistan, India and Pakistan. This was also the subject of an earlier article in this space.

With January’s London conference on Afghanistan and the recommencement of talks with India, we have an opportunity to construct the structure of South Asian ties on economics. Most of what has made it so difficult for Afghanistan, India and Pakistan to work together is rooted in the circumstances that led to the partition of British India.

As is documented, Jawaharlal Nehru, India’s first prime minister, attempted to undo the act of partition by economically crippling Pakistan. In this effort he had Afghanistan on his side. Afghanistan refused to recognise Pakistan’s independence. Kabul was the only capital to vote against Pakistan’s admission to the United Nations. The reason for recalling that bit of history is not to endorse the current tension that continues to define ties among these three South Asian nations. It is simply to stress that this historical baggage has been difficult to cast off.

One way of moving forward is to estimate the economic costs and benefits of the various policies the three countries have pursued vis-à-vis one another in the past. We could begin with the example of Pakistan’s refusal to grant transit rights to India for trade with Afghanistan and Central Asia. The benefits that would accrue to India are obvious; I have made the case on several occasions that Pakistan would also gain considerably. It would, for instance, charge transit fees from the buses and trucks using Pakistani space.

The country would also benefit by servicing Afghan and Indian operators on the transit route. There would be several other advantages including the development of warehousing at certain points; Lahore and some designated places on Sindh’s border with Rajasthan on the one side and in Quetta and Peshawar on the other.

Serious economic analyses of the benefits of this new economic relationship should take stock of the pros and cons of such an initiative. If even in light of the potential benefits, policymakers are reluctant to open Pakistan for transit trade then they would know the economic costs of their approach.

Only once in their troubled history have India and Pakistan taken a particularly difficult decision on purely economic grounds. This was the Indus Water Treaty signed by President Ayub Khan and Prime Minister Jawaharlal Nehru at the urging of a group of experts assembled by the World Bank. The treaty divided the Indus system between Pakistan and India. Pakistan was given access to the three western rivers, the Indus, Jhelum and Chenab. India could use the water in the eastern rivers of the Ravi, Beas and Sutlej.

The treaty also established an elaborate system of dispute resolution which has been used only once even though the two countries have fought two bitter wars since the signing of the treaty. The popular and not terribly well-informed nationalist press on both sides continues to rage against the treaty. A section of the Indian media continues to condemn Nehru for having given away too much; as an upper riparian, it says, New Delhi could have gotten a better deal.

Similar charges continue to be levelled against Ayub Khan on the Pakistani side of the border. This issue could be settled if a careful economic analysis is done to estimate the benefits that have accrued to the two sides as a result of the treaty. These have been substantial for both.

There are other areas of cooperation that could be explored such as the easing of the movement of people across the borders, special facilities aimed at facilitating religious tourism and across-the-border investments by entrepreneurs in the three countries. There has been little progress in making the South Asia Free Trade Area a success largely because of India and Pakistan’s mutual suspicions.

Pakistan now recognises that it could become the centre of regional commerce if it allowed regional trade to flow unhindered through its territory. It is foolish not to realise this potential. India has a policy of looking east for developing regional trade, Pakistan favours trade with China on the east and the Middle East in the west.

It needs to be recognised by policymakers on both sides that the two countries are each other’s natural trading partners. At the time of partition India was Pakistan’s largest trading partner. It was dislodged from that position as a result of the trade war between the countries in 1949 when Pakistan refused to follow India in devaluing its currency with respect to the American dollar.

An approach based on economics may provide enough ammunition to those who argue that it is in the best interest of both sides to work together. As Islamabad and New Delhi sat down at the conference table and renewed their dialogue, hostile voices were raised on both sides. India Today published a report under the caption of ‘The Karachi project’. It was claimed that intelligence agencies were using Karachi to train and launch disgruntled elements within the Indian Muslim community to commit acts of terrorism in India.

Serious reservations have also been expressed by some on the Pakistani side that the country, perhaps under the pressure of the Americans, was preparing to give up its claim on Kashmir. These kinds of claims and counter-claims will continue for as long as we don’t base relations between these two countries on economics. The same is true for Pakistan’s relations with Afghanistan.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Asian nations in the ‘catch-up game’ [/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 08 Mar, 2010[/B]

AS the Planning Commission continues to work on preparing the Five Year Plan 2010-15, it would do well to carefully study the changes in the global economy, in particular how the chairs are being rearranged on the Asian economic deck.

Two developments are particularly worthy of note: one, the reemergence of the state as an important economic player and, two, the emergence of China as the most significant Asian economy. The planners must reflect on both in designing Pakistan’s economic future.

Two developments, the first decades old and the second very recent, have reshaped – and are reshaping – the global economic landscape. The first is the process of globalisation that reduced the distance among different economies in the world, not in the physical sense, but in the sense of the easy flow of capital, trade, information and technology.

Globalisation has produced a global economy the like of which the world has never known and the process will continue to move forward with enormous consequences. The second development is what economists and people of finance call the Great Recession of 2007-09 to distinguish it from the Great Depression that took such a heavy toll in the 1930s.

What was “great” about this particular downturn in economic activity was that its origins did not lie in the normal working of the large economies that produce trade cycles with some frequency. The slow down that seems to be winding down was great for three reasons. The ferocity with which it struck; it took the form of an economic tsunami not many had predicted. It was caused not by the normal ups and downs in economic activity but by misplaced faith in the rationality of the markets. And it is likely to change dramatically the structure of the global economy. It is the third aspect of the Great Recession that I will explore.

Going back to the analysis of “catch-up” offered by Alexander Gerschenkron, the premier economic historian of the 20th century, the role the state plays in the process acquires special significance. There is the need to put considerable stress on what governments can do to better the lives of their citizens. The government’s role as an economic player was relegated to the back benches in the 1980s by the economic philosophy that accompanied Ronald Reagan to the White House.

Called The Washington Consensus, this view left the private sector to its own devices, even to regulate itself. Forced on the back-bench, that’s where the state remained until it was called upon to act again to save the world economy from collapsing in 2008. Summoned back, the state acted impressively in both developed and developing countries. China was at the forefront of this move closely followed by the United States.

It is interesting that even the Chinese had succumbed for a while to a weaker version of the Washington Consensus. Pakistan during the period of President Musharraf adopted this approach as well. With the state having roared back to life, what will it do to shape the economies of the developing world? In this context what role should be assigned to the state by the planners? One answer to the second question is to be found by looking at the reshaping of the global economy that is currently under way.

Taking cue from those who have studied various episodes of “catch up” in economic history when some of the economies that had lagged behind caught up with the leader, it is hard to escape the fact that China is currently involved in this process. China, which some time in 2010 will become the second largest economy in the world, overtaking Japan that held that position for several decades, will have enormous influence on the developing world, particularly countries such as Pakistan that it borders. This is a particularly relevant occurrence for Asia not because one Asian economy is replacing another. What makes it significant is that the structure of the Chinese economy and the way that structure is changing will matter enormously for the rest of Asia.

While Japan is from Asia, when its economy became “developed” it joined the ranks of those that were similarly placed. Japan’s linkages with Asia were weak; those of China are becoming strong. One good indication of this is the inauguration of the China-Asean Free Trade Area in January 2010 that will have profound consequences for the economies on its periphery.

Unlike some of the earlier catch up incidents, China, having almost overtaken Japan and may in the next several decades bypass the United States as well, will remain a relatively poor country dependent on the rich for markets and technology. This introduces an entirely new dimension in the “catch up” game.

For many decades to come, the global economy will be dominated by two economies that will not compete as much – as Britain and France did during the first catch up episode a couple of centuries ago – but complement one another.

Notwithstanding the current exchange of difficult words between Beijing and Washington, I believe that the global economic architecture will neatly arrange itself into three tiers: the United States and China at the top (the G2), a number of secondary powers in the middle (the G20), and the rest of the world forming the base of the pyramid.

Those who believe that such a system dominated by two economies will not be stable derive the wrong lesson from the Cold War when for four decades the United States and the Soviet Union confronted one another, sometimes with murderous intent. It was only the mutually assured destruction made possible by the possession of thousands of nuclear weapons by the two sides that prevented the globe from being reduced to a giant mushroom cloud. It is not necessary that a great power must always beat back competition and seek total domination. When competing powers need each other as do the Americans and the Chinese, they will learn to work with another. This is likely to happen within the context of the global architecture for economic management that is being put in place.

While mutual dependence is likely to create equilibrium in the global economy – and also keep the political system in balance – could the same be expected in Asia? The continent has not one, not two but three great economic powers.

While Japan seems not concerned with the second rank it is soon likely to assume in the continent in terms of the size of the economy, would India be content to be the third? More important will it be prepared to be relegated to the second tier in the hierarchical structure I see emerging to manage global economic affairs?

I would like to emphasise that for India to gain the economic and political stature it desires, it will need to achieve a number of things: tranquility around its borders, an economic system that delivers to the less advantaged segments of the population, particularly in terms of education and skill development, development of physical infrastructure that can support a rapidly growing and modernising economy, and an economy that is more outwardly oriented so that it can take full advantage of the rapidly changing systems of trade and production. If it is able to do most of these things there is no reason why some time in the future the system’s apex can’t expand from the G2 to the G3.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Persistent economic woes[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]At this stage, three types of investment are particularly important. These are: developing the human resource, improving the technological base of firms and improving physical infrastructure.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, 09 Mar, 2010[/B]

PAKISTAN remains in the de pths of economic gloom and des pair while most of the rest of Asia is bouncing back from the slowdown economists call the ‘Great Recession of 2007-09’. Pa kistan’s two giant neighbours are performing particularly well.
China’s rapid recovery has surprised even the most informed observers. In the last quarter of the previous year the economy expanded by 10.7 per cent. The rate of growth in 2010 is expected to be 10 per cent, perhaps even better.

The Indian economy has also begun to recover. The country’s finance minister, while presenting the budget for the year 2010-11, forecast that the rate of growth during the year will be 8.8 per cent. He believes that the country will touch 10 per cent GDP (Gross Domestic Product) increase in a couple of years. Industrial output in the fourth quarter of calendar 2009 increased by 17 per cent. Even Bangladesh is looking forward to a rate of growth of six per cent.

The picture in Pakistan is very different. The rate of increase in GDP in 200910 was about two per cent. It would have come out lower had the government not revised downwards the rate of increase for the previous year. For the current year, even the more optimistic government officials don’t expect the rate of increase to be more than 3.5 per cent. The Planning Commission is currently drafting the 10th five-year plan which will cover the period 2010-15. It would like to see growth pick up, perhaps, to five per cent average for the period. Even if this more optimistic projection is realised, the per capita income gap between India and Pakistan will widen considerably and Bangladesh could soon catch up with Pakistan. What is more worrying is that the impact on the incidence of poverty with this kind of growth rate will not be significant. This has all kinds of nasty implications for social and political stability.

Given this what should the authorities do to revive growth? There are many an swers to these questions. However, instead of listing all the imperatives for economic revival and growth, I will today focus on one contributor: increasing the economy’s productivity. The rate of GDP growth, of course, is a combination of the increase in population and the accompanying increase in the size of the work force and productivity. If the population is increasing at the rate of two per cent — Pakistan’s growth rate is said to be a bit lower than that — and total factor productivity is increasing by three per cent, the GDP will increase by five per cent.

What can be done to increase the rate of productivity of the work force? What can be done to improve the productivity of the capital employed in the economy? What should be done, in other words, to improve the efficiency of the economy?

In the spring of 2006 I had two interesting conversations on this subject with the country’s two top leaders — President Pervez Musharraf and Prime Minister Shaukat Aziz. I challenged the statements the two were making according to which their policies had put the Pakistani economy on the trajectory of high and sustainable rates of economic growth. Both had said that the Pakistani economy was in a position to increase at the rates between seven and eight per cent a year. Aziz had even persuaded the Newsweek about the validity of the story he was telling.

Calling Pakistan a “sleeping giant that was waking up”, the magazine put the Pakistani story in a large spread in one of its issues in March 2007. I told the president that it was highly unlikely that the Pakistani economy could grow at the kind of growth rates he and his prime minister were implying in their speeches. These growth rates would be possible only if the economy was operating with remarkable efficiency.

While I have not seen a recent esti mate of the efficiency of the Pakistani economy my guess is that in the current situation the ICOR (Incremental Capital Output Ratio) is perhaps as high as five to six. This means that the country has to invest five to six per cent of GDP to produce a one per cent increase in GDP.

Several types of investments need to be made in order to lower the ICOR. Of these three are particularly important: developing the human resource, improving the technological base of firms and improving physical infrastructure. In developing the 10th five-year plan the Planning Commission should clearly make provisions for these three types of investments and provide estimates of how they will increase economic efficiency.

The effects on the economy of power and gas shortages, of a poorly function ing railway system, of ports that can’t handle large ships so that cargo bound from or to Pakistan has to be offloaded in places such as Colombo and Dubai and then shipped to Pakistan, of conges tion on the roads, are apparent. What is not easily seen and hence not demanded by the citizenry are actions aimed at increasing the efficiency of the firms. Their improvement has to be the focus of public policy.

The Musharraf government appreciated at least one of these shortcomings. In the Higher Education Commission (HEC) it set up an institutional mechanism that promoted higher learning in technology and science. Much of significance was achieved.

However, as has happened so many times in the country’s history, the successor government discontinued some of the more ambitious and imaginative initiatives the HEC had taken. It is interesting to note that India has now decided to set up an HEC type of body so that the country keeps up with the advances being made in other parts of the world. Perhaps a public debate on the importance of the issues I have identified today as deserving of government attention will lend continuity to the policies once they are adopted. ¦

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Targeting high growth with equity[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 15 Mar, 2010[/B]

THE two continental Asian giants – China and India –seem to be adopting basically the same set of policies for moving forward the two large economies.

At first glance, Beijing and New Delhi, having recently announced policies they will be following as the recovery from the recent downturn takes hold, appear to be embarked on the same course. Parnab Mukherjee announced the budget for the year 2010-11 on February 26 and promised that the rate of Indian economic growth was headed towards double digits. He also opened the economy a little bit more to those outside the country who would like to place their bet on an expanding economy. Prime Minister Wen Riabao delivered his annual economic speech to the National People’s Congress on March 5 and also saw his country’s economy moving ahead briskly.

Both leaders were cautious about the international environment in which the two economies will be functioning. “While the global financial condition has shown improvement over the recent months, uncertainty about the revival of the global economy remains. We cannot, therefore, afford to drop our guard”, said Minister Mukherjee in his Lok Sabah address.

Much the same sentiment was expressed by the Chinese leader. “We must not interpret the economic turnaround as a fundamental improvement in the economic situation. There are insufficient internal drivers of economic growth” said the Chinese leader in his two-hour long address. In other words both capitals were indicating that they will not be pulling back on the efforts to stimulate their respective economies. These efforts had paid off but it was not the time to ease off.

Both leaders, while emphasising the importance of high rates of growth in their economies, gave a great deal of attention to distributive aspects. While the emphasis on redistribution was not new in the Indian way of thinking on economic issues – it was the platform on which the Congress Party was elected last year to another term in office – the stance adopted by the Communist party of China was a relatively new one.

A Communist country was supposed to look after its poor and the less advantaged. It didn’t have to make an explicit commitment to such a policy in its pronouncements and plans. But Prime Minister Wen went some distance in ensuring his citizens that meeting their social needs will be a high priority of the administration he was heading.

“We will not only make the pie of social wealth bigger by developing the economy, but also distribute it well. We can ensure that there is sustained impetus for economic development, a solid foundation for social progress, and lasting stability for the country only by working hard to ensure and improve people’s well being” he said in his address.

Reading together the two statements it is striking how much the Indian leadership emphasised the need to maintain high levels of growth rates while the Chinese leaders were promising to care for the poor.

Until recently – in fact up to the Great Recession of 2007-09 that shook the global economic system – the two countries had followed different models. China had relied much more on using external markets to develop scale for its industrial system. In that and several other respects, it had followed the East Asian model of export oriented industrialisation.

India, on the other hand, had pursued import substitution for industrialisation for more than first 40 years after achieving independence. When it opened its economy to the world outside starting in the late 1980s but more fully after 1991when the then Finance Minister Manmohan Singh had to deal with a serious balance of payments crisis, the Indians continued to be cautious about foreign participation.

Although the “license raj” that owed its existence to Jawaharlal Nehru’s socialisation of the Indian economy was dismantled, the participation of foreign capital remained constrained. It was allowed in a limited way into some sectors of the economy. Its involvement in the sectors of finance and retail trade was quite severely constrained. Foreigners were also not encouraged to participate in the development of the social sectors, in particular education. The Indians were now making an effort to open their education sector. They indicated that new incentives will be offered to private operators from the outside to enter the education market.

The Indian budget also promised a major effort in improving the quality and reach of physical infrastructure. The development of high-class highways was to be given special attention. In the budget for the railways, there was promise that quality of the services provided will be greatly improved by developing high speed railways. Here the two countries have adopted different approaches. The Chinese, having anticipated that a rapidly developing economy will need a well functioning transport system, began to invest in highways and railways early on. The Indians were now playing catch-up.

There are subtle differences in overall direction of public policy in the two countries. It is growth with continued emphasis on poverty alleviation in the case of India. It is considerably greater focus on distribution while maintaining a reasonable rate of growth in China’s case.

The Indian policy statement can be read as more directed at foreign audiences while that of the Chinese was more aimed at its own citizenry. New Delhi seemed anxious to make the case to foreign investors that the country should be a major destination for the funds they controlled.

With a high trade deficit and with still lower rate of savings than China’s, New Delhi was more dependent on foreign capital flows. It would like these to take the form of foreign direct investment. Portfolio investments were welcome but they had proven in the past to be a very volatile source of external flows.

However, to receive FDI in large amounts, potential investors had to be convinced that the Indian economy could expand at the rates that were comparable to those achieved by China and sustained over a long time. Minister Mukherjee, by repeatedly underscoring that a double digit rate of growth was well within India’s grasp and that such a rate of expansion could be sustained over time, was speaking to the foreign investor.

The audience for Prime Minister Wen was mostly within the country. He and his colleagues had heard the people. The people had voiced many concerns. The escalating price of urban housing was one of them. The discrimination against migrant workers said to number 240 million was another. Not only were their wages relatively low, they did not have access to the many social services that were available to the common urban dweller. They were also not secure about their place of residence. The Chinese law and practice required the unemployed to return to their place of origin.

Voices had also been raised about corruption in the ranks of the Communist party. The more informed public opinion that had the knowledge of such affairs was also worried about the widening income disparity. While Deng Xiaoping had famously said that it was glorious to be rich, he did not envision the kind of wealth accumulation that had occurred under the watch of his successors. It was interesting that an authoritarian structure was being so sensitive to the concerns of the common men and women. The Chinese prime minister promised to reduce the gap between the rich and the poor and between the more advanced parts of the country and those that had fallen behind.

In sum, Beijing and New Delhi were moving forward but were taking slightly different routes. For India achieving high growth rates was critical; for China, there had to be renewed commitment to improving the lot of the poor.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Know your history[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 16 Mar, 2010[/B]

WE don’t write much history; we read even less of it. Not much history is taught in schools and the little that is taught is not very accurate and reflects many biases that don’t help us to understand what we are and where we are headed.

I write all this as a prelude to expressing my strong belief that a society that does not come to terms with its past is not only destined to repeat it. It will also fail to draw any lessons from history.

As a person who has been in the field of economic history for decades, what is it that I think we should note from our history that can help us with our present and also give us the tools to fashion the future?

Probably the best way to answer this question is to define the ‘Pakistani way’ of managing the economy. Today I will focus on one aspect of our economic history: how we have allowed ourselves to come under foreign influence in the making of policy. We have done that in spite of a great yearning to be free of external influences. However, we are not prepared to recognise that the two positions are contradictory. To recognise this we have to be more conversant with our history, in particular our economic history.

A number of elements comprise the Pakistani way. The first, of course, is to put far more emphasis on the present than on the future to determine how we wish to spend our time and money. This attitude lends to emphasising consumption over savings and investment. For a person who does not live in Pakistan but travels to the country frequently, I am always struck by our lavish way of entertaining and the way we spend on occasions such as weddings, birthdays, anniversaries, even on events such as Valentine’s Day.

One direct corollary of this is that we have become very dependent on external capital flows for investing in our future. If foreign governments are the source of this flow of money then it is obvious that those who provide it will exact a price for it. Governments don’t normally provide charity. The only time they do that is when they face a natural disaster such as the earthquake in Pakistan’s north in 2005. On these occasions there is enough concern about fellow human beings for rich countries to come to the aid of those that are less fortunate.

In the normal course of things, however, the governments that give large doses of development aid seek to advance their strategic interests. If there is some truth in these assertions, the Pakistanis — or for that matter the citizens of any country — can’t have it both ways. They can’t continue to depend on foreign largesse to finance economic development and, at the same time, crave for an independent foreign policy. To be independent in foreign affairs, a nation has to be self-reliant. This was the basis on which leaders such as Mao Zedong in China and Jawaharlal Nehru in India built their nations.

In the case of Pakistan the leaders who were temporarily successful in the field of economics were those who were able to obtain large flows of external finance from abroad to meet domestic needs. This is why the rates of GDP growth in the periods of Ayub Khan (1958-69), Ziaul Haq (1977-88) and Pervez Musharraf (1999-08) were considerably higher than those at other times.

The fact that all three headed military administrations does not necessarily mean that the armed forces were more inclined to align the country with the West, in particular the United States. What it really implies is that the military did not have to bother about public opinion; it could forge relationships it regarded in Pakistan’s interests and also in its own interest. Sometimes the latter differed from the former.

Various public opinion surveys have shown that the Pakistani public does not approve of the United States and the policies Washington has been pursuing in various parts of the world. This view has not changed in spite of the change of administration in the United States.

There was a view when President Barack Obama took office that he would be able to improve the way the Americans were viewed by the people in the Muslim world. Last June he went to Cairo where he delivered a speech that addressed the main concerns the people of the Islamic faith had about the way his country had conducted itself in world affairs. He said that he was sensitive to the way Muslims viewed Washington’s policies. He had many friends from the Muslim community and several members of his family were Muslims. He had, in other words, heard it all. That was one reason why he travelled to Cairo — to try to build a strong bridge between two cultures; the Islamic culture and the West — so that mankind could work towards the achievement of common goals.

This message resonated well with most of the Muslim world but it seems not to have made any difference to the way the Pakistanis view the United States. Among the many different peoples of the Muslim world, President Obama is least popular in Pakistan. And yet, because of the way in which Pakistanis have managed their economy, they remain dependent on America and institutions such as the IMF and the World Bank over which Washington has considerable influence. This leads me to raise two questions.

First, why are the Pakistanis so critical of the United States and what the country stands for? Two, what needs to be done to translate this antipathy towards Washington into the right set of public policies? I will return to these questions over the next several weeks.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]How to avoid a steep fall[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 22 Mar, 2010[/B]

PAKISTAN’s spectacular economic decline over the last few years and an equally spectacular decline in the country’s future prospects should worry the policymakers.
That this is not the case is revealed by the actions of those who currently wield power in Islamabad as well as their policy pronouncements. Now that a new finance advisor(minister) has been appointed, this may be a good time to look at what has gone wrong and how some lessons could be learnt from history. Today, in this column, I will view Pakistan in the context of the geographic region to which it belongs.

The country is losing ground with every passing day and as each day passes it will be difficult to address the damage that has been caused. It is useful to compare Pakistan’s situation with that of other large countries in the neighbourhood. In 2010, the Chinese economy is likely to expand by 10 per cent. India is aiming to achieve a rate of growth of 7.2 per cent in the year 2010-11. At best Pakistan will manage a paltry increase of three per cent in its GDP, coming on top of only two per cent in the previous year. Translated into income per head of the population these growth rates mean increase of 9.2 per cent for China, of six per cent for India but only 1.2 per cent for Pakistan. The country is slipping badly in its own neighbourhood.

This is unfortunate since Pakistan belongs to the part of the world that stands at the threshold of an economic and social take-off. Several eminent economists have called the 21st century the Asian century. The countries in the region that have realised that this indeed is the case are gearing to take full advantage of the opportunities that are currently becoming available in Asia. There are also opportunities in the continent’s rapidly changing role in the global economy. If that recognition has come to Islamabad, there is little evidence of it in the making of public policy.

Islamabad owes the country’s citizen to formulate a medium-term strategy that will arrest the serious declines in output and equally serious increase in the incidence of poverty. Properly developed and articulated such a strategy will help the people to gain confidence in their future. With confidence should return investment. A well formulated economic and social strategy should also help to revive foreign interest in the Pakistani economy. Without this, it will not be possible to stimulate the economy.

It is interesting how different are the world’s priorities with regard to India and Pakistan. When senior government officials come to Pakistan they have only one thing on their mind: the role Pakistan must play in countering terrorism of which it is said to have become the epicenter. That was the preoccupation of Robert Gates, the US Secretary of Defence, who recently came calling on Islamabad.

He wanted to ensure that Pakistan’s resolve to beat back the terrorists operating from its soil was not weakened. When India is visited by the world’s powerful, their main concern is to ensure the Asia’s third largest economy – after China and Japan – will play in their fields as well.

The most recent visit to India by a high level international figure was by Vladimir Putin, Russia’s prime minister. The visit was considered to be important enough for the Financial Times to write an editorial on it. “Russia is trying an old flame”, wrote the newspaper.

In the gift basket Putin brought with him to New Delhi were “suggestions that Russia might accelerate its nuclear plant building programme in India and partner the giant democracy to produce new military equipment…Stronger ties with Russia carries some appeal for India which likes to keep its options open, and will be weary of over-reliance on the US.” When seasoned news analysts write about India and Pakistan they focus on economic potential in the case of the former and terrorism in the case of the latter. For instance, in a recent article written after a visit to India, Financial Times’ Martin Wolf was impressed with the “strong sense of the technocratic elite in India’s performance and prospects. Similar confidence is palpable among the business elite. I have little difficulty in imagining that India can sustain growth of close to 10 per cent a year. Under conservative assumptions, the Indian economy would be bigger than the UK’s in market prices in a decade and bigger than Japan’s in two.” However, when something positive is written about Pakistan the focus is on terrorism. For instance, Fareed Zakaria noted in a recent article published in The Washington Post that “a spate of good news has been coming out of that complicated country which has long promised to move against Islamic militants but has rarely done so.” Pakistan’s policymakers would argue that their options have been limited by the rising tide of Islamic extremism that the West greatly fears and that will have to occupy Islamabad’s attention for as long as it is not beaten back. The West is currently not interested in Pakistan’s economic potential and how it could be exploited by it for its own profit.

But then India also has many insurgencies and they too have taken a very large human toll on that country. In fact, India lost more people to insurgencies in 2009 than Pakistan did in that year. There are two reasons why the West is consumed by Islamic militancy than by the armed conflicts in many parts of India. One, it is affected by militant Islam as well while the troubles in India are of consequence only for that country.

Two, India has done a very effective job of getting the world to focus on the economic opportunities it offers and not on the many problems it faces at home.

The “Incredible India” slogan coined by an advertising firm and displayed at Davos a few years ago has worked well for the country. For Pakistan the description that it is the “most dangerous place on earth” first used by the magazine Newsweek has stuck and resulted in turning the financial world’s attention away from the country. There is a lesson to be learnt by the policymakers from the Indian approach.

One important lesson is that the world pays attention to the tone adopted by the country’s leaders. In India, the leadership from all parts of the political spectrum has been telling the world that the country has the potential to grow at the rates that have become common in East Asia and have been achieved by China. If there are armed insurgencies in the country they should be seen in terms of the products of economic growth and modernisation that are inevitable in rapidly changing economies. This was pointed out almost fifty years ago by the political scientist Samuel Huntington of Harvard University.

The Indian leaders, in other words, have provided the context for the many problems their country faces. They also emphasise the positive about their country: the size of the middle class and the market that that size represents, the size of educated workforce that can provide the people-deficient West with many of the services it needs, the country’s location next to the most rapidly growing part of the global economy, and the development of entrepreneurship in the country that can challenge the best in the world. It is time that our leaders also begin to think and speak positively.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Obama’s Asia policy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][CENTER]Islamabad should pay heed to significant changes in the way Asia is being looked at by Washington.[/CENTER][/B]

[B]By Shahid Javed Burki
Tuesday, 23 Mar, 2010[/B]

NO two American presidents could be as different in their view of the world as George W. Bush and Barack Obama. That the latter succeeded the former makes this change all the more interesting to watch.
One of the major differences is the way the two view Asia. China is at the centre of the difference between these two heads of the American state.

There is now a consensus among Asia watchers that the 21st century is shaping up to be Asia’s century. Sometime in 2010, China will overtake Japan as the second largest economy in the world. It has already overtaken Germany as the world’s largest exporting nation. President Bush and his advisors saw this coming but were fearful of China’s rise.

In the summer of 2002 as the Americans were preparing to observe the first anniversary of the terrorist attacks of Sept 11, 2001, the Bush White House issued an extraordinary policy statement. It stated openly that Washington would not be prepared to share with any nation its status as the world’s premier economic and military power.

In case it was challenged, it would be prepared to take whatever action was required to preserve its pre-eminent position. It was clear that the statement was primarily aimed at China, a country that was rising fast both economically and militarily. The Bush administration quickly translated this policy into action by vigorously courting India as a country that could provide balance to China’s rapidly increasing strength. It proposed an agreement with India that would give the latter the status of a nuclear power in return for some minimal safeguards.

When Pakistan asked for something similar, Islamabad was told bluntly that it was not quite ready to be given that status. Under any other leader, the Indians may not have been that eager to sign off on the deal. But in Prime Minister Manmohan Singh they had a person with a strong western bias. He used all the political capital he had to get the Indian parliament’s approval for the US offer even though the opposition opposed it bitterly.

The Bush approach was a throwback to an earlier period. In the 1950s, Washington signed a series of defence pacts to create a ring around the Soviet Union and China. Pakistan was wooed then as a partner in that particular enterprise. This time it was India that had to be recruited as a supporter.

President Obama with a strong Asian background came to office with a very different world view. This was articulated clearly and eloquently during his first official visit to Asia in November last year. In a major address delivered in Tokyo, he said that he would seek to work with China to create a global order that would bring peace and prosperity.

Unlike his predecessor, he had no problem in sharing the world stage with another great power, especially China. He chose to give this message in the Japanese capital in order to emphasise that the previous American approach towards Asia that centred on a deep relationship with Tokyo had served its purpose. It was now time to move on to another phase in which Beijing would be a serious US partner.

This fundamental shift in approach troubled several constituencies in the United States. The powerful India lobby was highly agitated as it saw a troubling shift in Washington’s attention. The American right that had so thoroughly dominated policymaking during the Bush period was also concerned. It continued to believe that America should not so easily surrender its position as the apex power in the international order. It favoured not only India as a more acceptable partner, it also began to put forward Indonesia as a country that would serve the American purpose.

Jakarta was the most important stop for President Obama on his second visit to Asia originally scheduled for March 18 but now postponed to June. There was plenty of advice given to the American leader by the think tanks on the right of the political spectrum. “Mr Obama’s trip should lay to rest questions about his goals in Asia,” wrote Michael Auslin of the American Enterprise Institute (AEI) in The Wall Street Journal. The AEI had provided several policymakers to the Bush administration and had accommodated them once there was a change of government in Washington. The conservative agenda is clear. Also clear is the way the conservatives believe Washington should conduct itself in Asia. They don’t agree with the Obama position that the time has come for the United States to have China become a coequal. Instead they would like the United States to recruit a number of Asian countries as members of its team.

Containment of China is not mentioned as the main purpose of this strategy but that is what it amounts to. Obama should “signal a new commitment to supporting liberal regimes and maintaining America’s crucial role in the Pacific. Mr Obama should not seek to maintain the status quo but should unveil a bold agenda in Indonesia and Australia to use American resources to work with Asian nations to enhance maritime security, spread best standards in business and industry, reduce corruption and strengthen human rights and civil society. He should announce a new strategic relationship with Indonesia, whose goal is to overcome its reluctance to work more closely with Washington”, Auslin continued in his article.

At the same time the overtures made to India by President Bush should not be allowed to go to waste. It is proposed that Washington should convene a “liberty and prosperity roundtable” to be held annually. “For Washington this would be a way to reinvigorate America’s half-century alliance with Japan, to encourage South Korea to play a regional role commensurate with its economic standing and to further cement ties with India and its neighbours.”Islamabad is perhaps too preoccupied with the war against terrorism to take note of these significant changes in the way Asia is being looked at by Washington. It needs to pay heed.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Taking advantage of a changing world order[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday 29, March 2010[/B]

EVEN though some experts suggest that the current international economic turmoil is caused by globalisation, the fact remains that the increasing exchanges among the world economies will continue to reshape them. Those countries that position themselves to take advantage of globalisation will benefit. Pakistan, unfortunately, is not one of them.
Those that remain internally focused will be left behind. Again, unfortunately Pakistan belongs to this category of nations. To appreciate what is happening to the global economy, we might draw upon the work done by Goldman Sachs about the future of the world economy. It was this institution that, some years ago, developed the notion of the BRICs – Brazil, Russia, India and China – as one of the emerging centres of global economy.

The accompanying charts provide estimates by Goldman Sachs of national incomes for the 22 largest economies in the world in the years 2025 and 2050. While such long-term forecasts seldom turn out to be correct, what is interesting about those produced by the bank are some of the suggested changes that may occur in the ordering of the economies around the globe. According to these estimates, Pakistan in 2025 will be the 20th largest economy in the world, slightly larger than Egypt and Bangladesh.

There is a fairly significant realignment of the economies in the next 15 years. By 2025, the world economy is likely to be dominated by United States and China, each with national incomes close to $20 trillion in 2006 prices.

Japan, the next largest economy, is likely to be only a quarter of the size of the two largest. India is likely to be in the fourth position with its national product slightly smaller than that of Japan’s. As the display in the chart shows the world has two very large economies and then 20 relatively smaller ones. There is considerable difference between the sizes of the two large economies and those that are smaller in size. By that time the G7 as currently constituted will not represent the largest economies in the world. Already two among the seven largest economies will be from what is now called the emerging world.

Eleven of the 22 largest economies are in Asia. In the 25 years that follow there is further realignment with China overtaking the United States. Its GDP is expected to increase to $70 trillion, three and a half times its size in 2025. The United States economy will also increase but will only double its size, increasing to $40 trillion.

India, according to these estimates, will be almost equal in size to the economy of the United States. What do these increases in the size of the economies suggest about the rates of GDP growth? To increase three and half times over a period of 25 years implies an annual average rate of growth of 5.2 per cent. This is projected to be the rate of growth of China. For the United States, the implied rate of growth is 2.9 per cent; for India, 8.7. These are in line with the consensus view of most economists. The question is whether these averages can be maintained over such long periods?

There will be other significant changes. Japan’s relative decline continues. It will drop from the third position in 2025 to the eighth in 2050. The country’s rate of GDP growth will be less than one per cent a year. Some other current leaders in the world economy will also see major changes in the relative ordering.

Germany is likely to drop from being the 5th largest in 2025 to the 10th largest in 2050, UK may go from the 7th to the 9th and France may move from the 8th to the 12th. Of the many surprises in these estimates is the change in the relative positions of the European economies with Britain becoming the largest in the continent. No European economy will be among the five largest in the world by 2050.

Indonesia and Nigeria will see major improvements in their positions; the former moving from 14th position in 2025 to the 7th while the latter jumps from the 18th to the 11th. Some of the Latin American economies are also expected to do well. Brazil and Mexico will become the world’s 4th and 5th largest respectively, moving up from the 9th and 11th positions.

Among the world’s five largest economies in 2050, two – China and India – will be Asian, two – Brazil and Mexico – will be Latin American and the 5th, of course, will be the United States. By then the current G7 grouping is totally irrelevant; the United States will be the only country from this group that will still be included among the seven largest in the world. It is clear that the need for revising the current institutional structure will increase with every passing year.

Pakistan is identified as one of the laggard nations, dropping its position in the global order from the 20th to the 21st between 2025 and 2025. It is estimated to perform poorly relative to other large Asian economies. Could the country do better than projected by the Goldman Sachs estimates which were obviously influenced by the poor performance of the economy in recent years? I will come back to this question a little later in the article.

What are the main drivers of growth as seen by Goldman Sachs? Three of these stand out; expected increases in the size of the population, access to natural resources, and trade competi tiveness. More populous countries do relatively well, in particular those that are investing in improving the quality of the human resource. For the countries that are seeing declines in population size – this includes all countries in continental Europe as well as Japan – aging populations will begin to weigh increasingly on economic performance. As the centre of gravity of the global economy shifts towards the emerging world, the use of natural resources, in particular oil, will increase. This is one reason why the oil-rich countries do relatively well in these estimates.

The inclusion of international trade as growth drivers suggests further globalisation in production processes. Trade as a proportion of total international product will continue to increase and the countries that are geared to take advantage of this development will do relatively well. Trade in parts and components will expand faster than the rate of increase in total trade. This will bring greater benefits to the countries that are well integrated in the changing global production process. Could Pakistan improve its situation as the world changes? It could but it will have to break from the recent trend. This will require at least four policy initiatives. The country will have to rely much more on internal resources for needed investment. Only then will it succeed in climbing on to a growth strategy that can be maintained over time. Second, it will need to improve the technical base of the economy.

This will mean, in turn, greater focus on human resource development. Third, it will need to restructure its economy so that it can better perform in the global production system. And, finally, it will need to focus much more on increasing trade as a proportion of its gross domestic product. It would necessary for the policymakers, as they devise the country’s future, to keep in mind what is happening to other economies in the world.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Economic challenges[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 30 Mar, 2010 [/B]

Pakistan has a new finance adviser, a man of exceptional background and many qualities. Included in his background is service with the World Bank and one of his assignments has been giving advice to Saudi Arabia.

He also had very successful tenures as the finance minister of Sindh and minister in charge of privatisation. It was only palace intrigue that prevented him from becoming minister of finance in the second administration assembled by then President Pervez Musharraf.

In other words, Abdul Hafiz Shaikh who has assumed his new job is well versed in Pakistan’s economic problems and its prospects. That said, it would not hurt if he received some advice from such long-time students of the Pakistani economy as myself.

I would suggest to Mr Shaikh to study the country’s past, get to know its present and plan for its future. In each of these areas he needs to focus on those issues that will help him better manage the economy. By my reckoning there are four of these in terms of lessons from history, and three each to be dealt with by understanding the present and planning for the future. In other words my advice touches on 10 subjects.

Let me begin with the past. We must study our troubled economic history in order to draw lessons for the future. There are many lessons to be learnt but four are particularly important. For a variety of reasons, Pakistan has neglected the development and modernisation of agriculture, its most important endowment at the time the country gained independence. It encouraged industrialisation by providing liberal incentives to private entrepreneurs. It neglected to develop its human resource by educating and training the large population. And it paid little attention to orienting the economy towards the production of exports.

One way of correcting these mistakes is to focus the government’s attention on these four areas. There is an urgent need to improve the technological base of both agriculture and industry. The sector of agriculture should be prepared to provide the economy with an export base. Industry must learn to stand on its own feet and not remain dependent on government largess.

In devising a strategy to improve the quality of human resource, the government needs to ensure not only the achievement of the Millennium Development Goals with respect to primary education and female literacy. It also must pay attention to developing higher level skills. A large population offers us the opportunity to develop the services needed by labour-short economies in the West. This will only happen if the skill level of the people is improved.

In so far as the present is concerned there are three things that will need the attention of the new finance adviser. He must recognise that the government in Islamabad overspends, under-collects taxes, and is not planning for the future. I will take up each of these three things in turn briefly.

In taking a close look at government spending it would be useful to carry out a detailed public expenditure review. It will show a number of areas of great waste some of which can be reduced by redesigning the way the government compensates its employees. By monetising a number of ‘perks’ given to those who occupy relatively senior positions the government will not only save itself a lot of money. It will also increase savings by the employee who will be less willing to spend on items like transport and telecommunications when the resources have to be deployed from cash compensation provided by the state. Devolving more functions to the provinces — and for the provinces to do the same to local governments — will help to reduce the amount of duplication that now occurs.

A concerted effort is needed to reverse the recent trend towards a declining share of taxes in GDP. By now Pakistan has reached the level at which it cannot spend any amount on development unless money is available from abroad. This is clearly not a sustainable situation if the managers of the economy wish to set the country on a trajectory of a high rate of growth that can be sustained over time. Dozens of studies have been conducted by many development agencies on what needs to be done in order to improve the tax base. The only way to get more people into the tax base is to make it very expensive for them to escape it. Also, some of the areas not taxed have to be brought into the tax net. These include agriculture, trade and many services.

Turning to the future, our policymakers must recognise three things: the country’s large economic potential will not be achieved unless the economy is fashioned in a way to take advantage of the enormous changes taking place in the international system of production and trade, unless Islamabad concludes peace with New Delhi to benefit from one of the world’s largest and most rapidly growing economies located just across the border, and unless the country’s politicians realise that the economy would be better managed by delegating a number of policymaking functions to the provinces.

A strategy that covers these 10 areas would serve Pakistan well. The country needs to develop agriculture, reduce the dependence of industry on the state, intensify efforts to provide education and skill development to the large and expanding workforce, and develop a viable programme aimed at expanding exports and thus increasing the trade-to-GDP ratio. It needs to reduce wasteful government expenditure while increasing the tax-to-GDP ratio. It needs to make trade the driver of growth by focusing in particular on trade with India. And it needs to develop the capacity to do serious analytical and strategic work to plan for the future.

The last can only be done by a revitalised Planning Commission working closely with a number of think tanks in the private sector. Perhaps the best way to begin will be to organise a brainstorming session involving some of those who have a deep knowledge of the economy.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Emerging trends in world trade[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 05 Apr, 2010[/B]

PAKISTAN’s senior leaders in their discussions with the Americans and the Chinese have emphasised that the country in addition to aid, also needs opportunities to trade. The United States is at this time the single largest importer of Pakistan’s commodities, manufactures and services. That this is the case is the consequence of politics rather than economics.

Economists have a theory they call the gravity model of trade according to which the direction of trade is determined by the mass (size) of the trading partner and the distance involved.. Applying this to Pakistan’s case, the direction of trade should be very different from what it is.

China should be the largest trading partner given its physical proximity to Pakistan, the growing size of its economy and the rapid growth in its gross domestic product. India should be the second largest.

However, to move in that direction will not only need the resolution of long-standing disputes with India. It will also require a fairly significant restructuring of the country’s economy. This the various governments that have held sway in Islamabad have not done either for political reasons or for lack of full understanding about the important role trade can play in developing the economy. In other words, the emphasis on trade by the Pakistan administration is correct. But I have a difference with the policy makers about the content of the trade dialogue being pursued with the large trading partners. Before indicating how I would conduct the dialogue on trade, I will provide some data on some of the recent trends in international trade.

According to a report recently released by the World Trade Organisation (WTO), world trade is projected to expand by 9.5 per cent in 2010, twice the rate of growth expected in global GDP. This is a striking turnaround. In 2009, world trade shrank by 12.2 per cent, the largest decline in several decades. International trade therefore will see a turnaround of almost 22 percentage points. Slow down in trade was much lower in previous recessionary periods. It declined by 0.2 per cent in 2001, two in 1982 and seven per cent in 1975. As measured in dollar terms rather than volume, the drop was even larger. The value of trade fell by 25 per cent to $12.15 trillion. This was because of sharp decline in commodity prices, particularly oil and agricultural products. The decline in shipments was accentuated by lower demand for consumer durables such as automobiles and investment goods like industrial machinery.

There is consensus among trade economists that the measured decline in exports might have been exaggerated by some of the structural changes in the pattern of trade. Global supply chains have multiplied over the years in which goods cross national borders several times during production process, getting counted as exports more than once, before arriving at their final destination.

“We see the light at the end of the tunnel, and trade promises to be an important part of the recovery”, said Pascal Lamy, the Director General of WTO. The anticipated increase in international trade will come from both large exports and imports by China and India, the two economies that are growing most rapidly.

Export declines were greater last year for the major trading nations than the overall decline in world trade. Japanese exports fell by 24.9 per cent; the European Union by 14.8 per cent and the United States by 13.9 per cent. Exports from China also declined but by a smaller percentage – 10.5 per cent – compared to decline in international trade. The WTO confirmed that China overtook Germany as the world’s largest exporter of merchandise in 2009. It now accounts for 10 per cent of world trade.

This means there are significant structural changes taking place in global trade. Developing countries are carving out a larger presence in world trade. Exports from developed countries are expected to increase by 7.5 per cent, two percentage points lower than the increase in international trade. The increase for rest of the world, mostly from the large emerging economies, is projected at 11 per cent. What do these changes in the pattern of global trade imply for a strategy for Pakistan? It is correct to focus on increasing exports in order to pay for imports as well as becoming the source of investment in the economy. But as suggested, it is important to change the direction as well as the content of trade.

Trade figured prominently in the strategic dialogue with the United States held in Washington in late March. However, I believe that the approach taken by the government was not correct. Islamabad sought larger access for textiles in the US market and to expedite the establishment of special export processing zones in the areas that border Afghanistan. There are problems with both policies. Obtaining a larger share in textiles in the United States will only keep emphasis on an industry that does not have much future in the global economy.

It is important for Pakistan to wean itself away from this sector than to continue to emphasise its importance for the economy. While it is correct that the sector accounts for the bulk of formal employment in manufacturing. It is also correct that by increasing exports to the United States, it will be possible to increase immediately the number of people employed. But these are short-term improvements in an economy that suffers from a number of structural weaknesses. To remove them will need greater understanding of the dynamics in international trade.

Policy makers should pay attention to two significant changes in international trade. One, Asia is now playing a larger role in the increase in international trade than the more developed parts of the global economy. And, trade in parts and components is much more significant than that of finished products. Given these changes in the pattern of international trade, it is important for Pakistan to pay much greater attention to trade with the countries that are near and to produce the products for export that have high and growing international demand. For instance, developing strategic relationships with the rapidly expanding automobile industries in China and India would help to develop the vendor industry.

I also believe that an emphasis on the creation of special processing zones in some sensitive parts of the country in which production will be directed at the United States is a mistake. It will only introduce more distortions in the economy.

It will also lead to misuse of the incentives as happened in the case of the Gadoon industrial estate that was set up decades ago to provide opportunities to entrepreneurs from the backward areas. However, in that case industrialists from the more developed parts of the country simply created a token presence in the estate to draw benefit from the tax incentives that were given.

The main conclusion that I draw from this analysis is that in framing a structure of incentives to promote trade as a driver of economic growth and modernisation, it is important to understand the opportunities that are available in the global economy. Ignoring the trends will only retard progress.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Strategic dialogue with US[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 06 Apr, 2010[/B]

THE tenor of the statements issued by the two sides following the conclusion of the strategic dialogue between Pakistan and the United States last month would suggest that both Islamabad and Washington achieved most of their objectives. The large Pakistani delegation achieved most of what it wished to get from the Americans.

The United States was relieved that it had finally placed Pakistan on the track on which it wanted to have it proceed in terms of its fight against terrorism especially with reference to carrying out its Afghan policy.

The Pakistani group made up of politicians, and senior civil and military officials came to Washington hoping that their relations with the United States would be placed on firmer ground. The off-and-on nature of this relationship over the last half century has hurt Pakistan. Washington sought Pakistan’s help when it suited its strategic purpose.

This was the case during the period of Ayub Khan when the Americans were busy constructing a wall around the communist world in Asia and Europe. This was also the case during the Ziaul Haq period when Washington needed Islamabad’s help to drive the Soviet troops out of Afghanistan and when America, in the period of President Pervez Musharraf, wanted Pakistan’s help to protect itself against the rising tide of Islamic extremism.

There are two reasons why Pakistan continued to turn to the United States even though the latter had demonstrated repeatedly that it did not have the staying power once its immediate concerns were satisfied. The first, of course, was the concern with India. There may have been good reason for this in the early days when the first generation of Indian leaders, having been disappointed that they were not able to keep India united after the departure of the British, attempted to do away with partition.

As India became progressively more powerful economically and militarily its interest concerning Pakistan changed. The Pakistanis, however, have not adjusted fully to this change in the circumstances of the two countries. I believe this was the thrust of the position taken by the Indian foreign secretary in the conversation with her Pakistani counterpart.

The other reason for Pakistan’s continued interest in being close to the United States was its inability to generate enough resources from within the country to pay for investment. Without foreign capital flows Pakistan can only see its economy grow at four per cent a year; with large amounts of finance coming in from the outside it has demonstrated that the GDP can increase at the rate of eight to nine per cent a year. The quantum and quality of external flows is heavily influenced by Washington’s attitude towards Islamabad.

The stop-and-go nature of the relationship between the two countries has meant that the Pakistani economy was on a rollercoaster ride: the economy did well when US attention was turned in Pakistan’s direction. It did poorly when Washington lost interest in Islamabad. This type of relationship may have eased Pakistan’s economic problems over the short term but did little to secure the country’s future over the long term.

Islamabad sent a strong team to Washington to ensure that relations between the two countries would be less subjected to the latter’s short-term interests. It was able to push the Americans towards putting in place a strategic dialogue between the two sides and to have it conducted at the senior political level. As one American analyst put it, “the ‘strategic dialogue’ was by itself meant to send a message: the administration used the term reserved for the substantive, wide-ranging exchanges it carries on with important countries like China and India”.

By agreeing to change the nomenclature of the discussions held between the two countries, Washington brought Islamabad to the same level as Beijing and New Delhi. At a reception on March 24 at the State Department Secretary of State Clinton said that the two governments had agreed to meet at the senior political level every year and that the next round of discussions would be held next year at Islamabad.

Given Pakistan’s grave economic circumstances and the situation in the part of the world in which the country is located it is not surprising that economic assistance, help to the military to improve its capacity to fight insurgency, America’s Afghan strategy and Islamabad’s resolve to fight Islamic militancy were the main areas of focus in the dialogue. Pakistan came well-prepared to discuss three of these four issues.

Where its own preparation fell short was in the area of economic development. The 56-page paper it gave the Americans had a list of projects for which it needed American assistance. But a project list does not make a strategy. There was no indication as to the strategy the policymakers were likely to pursue to bring about a number of needed structural changes in the economy.

These included raising more resources from within the country for the government as well as the economy, thus making both less dependent on outside flows; increasing the economy’s capacity to export in light of the changes occurring in the global system of production and in the direction and composition of international trade; improving the quality of human resource so that a large and young population became an economic asset rather than remained a political and social burden; and improving the quality of governance.

There were two areas of interest for Pakistan where it did not see much movement on the part of the United States. One was the desire to have the country recognised as a nuclear power which would make it possible to access nuclear technology. The other was to engage the United States in resolving the many disputes with India. In the press conference following the conclusion of the dialogue Ms Clinton was non-committal on both.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Provincial autonomy sans fiscal devolution[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 12 Apr, 2010[/B]

THERE cannot be any doubt that the 18th Amendment to the constitution will have a profound impact on the way the economy is managed. The federating units will receive additional powers as a result of the abolition of the concurrent list put into the 1973 constitution by its framers.

This will mean transferring large amounts of economic authority to the provinces. They will, for instance, have the right to manage labour laws, environmental impact of development in both the public and the private sectors of the economy, generation of much larger amounts of electricity than currently permitted, development of infrastructure etc.

This will happen only if the provinces find a way of financing these activities. If they remain dependent on the central government for funds, the autonomy promised by the amendment will remain illusory. What is the meaning of the 18th Amendment for economic decentralisation? While Pakistan may be on the way towards establishing not only a fully democratic system with political authority vesting in a directly elected parliament, it may also be moving towards the creation of a truly federal system in which there is sharing of power between governments at different levels – between the federal and provincial governments and between provincial and local governments. If this happens what will be the impact on the economy and on delivering services to the people?

The answer to this question has been provided by many theoretical and empirical studies done over the years by scholars from both developed and developing countries.

While many benefits have been claimed for federalism, it is “paradoxical that that we observe so few countries in the world which posses all the attributes of a strong federalist structure”, writes Dennis C. Mueller of University of Vienna. “There are two possible explanations for this paradox. First, there may also be several disadvantages associated with federalism, so many that for most countries the disadvantages outweigh the advantages. Thus full-blown federalism may be rare, because in fact it is undesirable. The second possible explanation for federalism’s rarity is that it is somehow inherently unstable. When it is chosen, it fails to survive, not because of any fundamental difficulty in the outcome it produces, but because of the existence of forces in a democracy which undermine it.”

To explain the case for federalism we should perhaps start with the reason why the state is involved in economic matters in the first place. The main reason for this is made in the public choice literature according to which markets fail in many situations particularly when public goods such as defence of the borders or police protection or a bridge connecting two places across a river are to be provided or where what economists call externalities become important. There are positive and negative externalities. Markets are less efficient providers in both cases; the governments, at least in theory, do a better job. But what type of government? There are three possibilities: a unitary state, a federalist system, or a confederation. I will concern myself with the first two.

A unitary system need not be distant from the people especially when the state is decentralised with government departments organised to reach people where they are located. This was the system used by the British during their long rule of India and was the one that Pakistan inherited when it became an independent state.

But it was not a federalist system in the sense that elected representatives of the people were not responsible for providing public goods to the people. That responsibility rested with the officials appointed by a highly centralised state.

In a unitary system, responsibility to the people is only at the central level. In a federal system people through elections have control over those who serve them. That in theory is the system that Pakistan attempted to establish following the adoption of the 1973 constitution.

Once the decision is made to establish a federal system the next question concerns its optimal design. How many levels of government should there be is one of these questions? What should be the division of responsibility among them? How should the governments at various levels finance their activities? The 1973 constitution established two tiers of government, one at the central and the other at the provincial level.

The 17th Amendment introduced into the constitution by President Pervez Musharraf effectively introduced a third tier into the structure. This was done by devolving various sate responsibilities to an elaborate system of local government. A new position was created to assign responsibility for delivering public services to an elected official called the “nazim”. This official was to be elected by the people and the bureaucracy at the local level was made responsible to him (or her).

The 1973 constitution – even when amended by President Musharraf – did not provide many resource generation responsibilities to the governments at the sub-national levels. They were mostly dependent on the central government for financing their activities. The provincial governments were given some say in the amount of resources they obtained from the centre by their representation in the National Finance Commission. The NFC was to be convened every five years and decide on the formula to be followed for allocating the resources available in what was called the divisible pool.

However, this provision, like so many other in the constitution, was largely ignored. For instance, the most recent NFC award was signed in 2009, almost 13 years after the one it replaced. Whatever shares were agreed upon were provided to the provinces in the form of grants. According to many economists, this way of providing resources to the federating units introduces serious distortions.

More than a 100 years ago, the economist Knut Wicksell established what has come to be called the Wicksellian connection. According to this each public expenditure should be coupled with a tax to finance it so that the voting public knows how much it is paying for the services being provided. Some experts go a step further. They suggest that the people receiving services from the state no matter where the state is located should be charged for the services they are being provided.

This approach serves several purposes. It forces the state to be efficient in the business in which it is involved. It also makes it possible for the people to bypass the state and go to the private sector if they are not happy with the services being made available by the state. This is what has happened in the case of education and health for the more well-to-do segments of the society. The people who can afford to go to the private sector have largely abandoned the state in these areas.

There is a virtual consensus among economists that intergovernmental grants lead to an expansion of the public sector – there is empirical evidence to suggest that a local government generally spends a far larger fraction of an unconditional grant from a higher level of government than its citizens would consider to be optimal. Applying this finding to Pakistan where financing for the provinces will come mostly from the NFC awards, 18th Amendment induced autonomy will not necessarily lead to economic efficiency. The provinces must be given a way to finance most of their own development.

The main conclusion from this discussion should be clear. While the 18th amendment has taken a major step forward in moving towards a federal system, the real test of efficiency will come once a system of providing services which the provinces will have the responsibility is decided upon. The amendment has largely left this as an open question. That is a mistake. It is only when the devolution of responsibility is coupled with the responsibility of raising resources that the real test of the new system will be in place.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Pakistani diaspora in US[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 13 Apr, 2010[/B]

ON April 1, 2010, the US government conducted the population census for the year 2010. That this should be done at the beginning of each decade is a constitutional requirement. The American government is required to count the number of people that live in all the states of the union on April 1 of the census year.

This needs to be done in order to apportion seats in the House of Representatives, the lower house of the US Congress, and to determine the amount of federal funds that must flow to each of the 50 states.

The responsibility for conducting the census and maintaining population statistics lies with the commerce department. The reason for this is contained in what the Americans call the ‘commerce clause’, the provision in the constitution that allows the free flow of goods, commodities and people among the states of the union. This clause was used by various administrations in US history to increase the presence of the federal government in the US system of governance.

The department sends out to all the households in the country a simple form they are required to fill and mail back on or around the date of the census. The form has questions pertaining to the name, gender and race of each member of the household. The relationship of the persons residing in the households to the head also needs to be indicated. This time, for the first time, the census-takers have included ‘Pakistan’ as a race for those responding to the census questionnaire. This means that for the first time the US government will have a rough idea about the number of people of Pakistani origin who live in the country.

This estimate will be ‘rough’ for the reason that the racial identification of the people filling the form is entirely up to them. There is no doubt that several people of Pakistani origin will misidentify themselves. This is for several reasons of which two are particularly important. For those who acquired US citizenship and the country’s passport, the place of origin is identified from the place of birth. Thus those who were born in India but migrated to Pakistan are still identified as Indians in their American passports.

The other reason stems from the belief that by identifying yourself as a person of Pakistani origin, you may be exposing yourself to extra checks at US points of entry and exit. Until some days ago Pakistan was identified as one of the 14 countries whose citizens were subject to extra screening by the Travel Security Administration.

While the census form clearly states that the information provided therein is strictly confidential, it is known that various government agencies share a great deal of data as part of the American ‘war on terrorism’. There is no confidence that the information given on the census form won’t be passed on to law-enforcement agencies. In the environment that prevails in the US, people of Pakistani origin have become very cautious about revealing their national identity.

Having some idea about the number of people of Pakistani origin who live in the US is important for several reasons. It will influence the attitude of the members of Congress towards Pakistan as has happened in the case of India and other large diasporas such as those from Israel, Greece and Armenia. This information will also help the US citizens of Pakistani origin get organised at the state level. It is from the states that a great deal of power wielded by Congress flows. Exerting pressure on state representatives is one way of influencing the making of public policy in the United States.

The third reason is the role that people of Pakistani origin can play in the development of their original homeland. That the presence of a reasonably prosperous Pakistani diaspora in the US can have an impact on the economic development of the homeland was recognised by Washington when Secretary of State Hillary Clinton invited its members to attend a reception hosted by her in honour of the Pakistani delegation that came to Washington to participate in the strategic dialogue with the US. In their addresses she as well as Foreign Minister Shah Mehmood Qureshi invited members of the diaspora to get more involved in the development of what was once their homeland.

The size of the Pakistani diaspora in the US has increased mostly through immigration. In the 1970s and 1980s, the US admitted a large number of people from the developing world to fill the skill gap that had emerged in the country. Visas — and ultimately green cards and citizenship — were granted without much hesitation. It is for this reason that the Pakistani diaspora is dominated by the professional classes — physicians, engineers, accountants, economists.

However, when it became known that the US could also absorb semi-skilled labour, there was a large inflow into the country of those who are called ‘illegals’ — people who have overstayed their officially sanctioned sojourn or have entered without proper entry papers. That there are many people of Pakistani origin in this category was revealed by the deportations that took place after 9/11. The US is unique among developed countries that it grants automatic citizenship to the children of even those parents who are in the country illegally. This is because of the 14th amendment to the constitution according to which those born in the US automatically became the country’s citizens.

I have argued for years that Pakistan should develop a well-thought-out strategy for attracting finance and talent from the large diasporas its citizens have created in many parts of the world. This is particularly the case for the Pakistani community in the United States which is more prosperous than the communities in other parts of the world and which has also well-developed skills. The US census of 2010 provides an opportunity to begin strategic work in an important area.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Will rising oil price stifle recovery?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 19 Apr, 2010[/B]

OIL prices have begun to rise just as Pakistan seems to be emerging out of a deep economic recession. The increase in oil price was partly responsible for the sharp slow down in the economy in 2008-09. The rate of GDP growth declined to only two per cent that year, one of the lowest in the country’s history.

How badly will the current oil price rise hurt the economy? The answer, given the experience of 2008-09, is that the effect on Pakistan will be considerable. It could – probably would – once again result in increasing the trade deficit which, in turn, will have an impact on the balance of payments.

The most recent rise in oil price comes at a time when the flow of funds from the IMF is stalled because of the lack of progress the country has made in instituting tax reforms. There is lack of satisfaction at Islamabad’s ability to move in instituting the value-added tax (VAT). This is considered vital for increasing tax-to-GDP ratio from less than 10 per cent, the lowest in a major emerging economy.

With the flow of funds from the IMF no longer certain to arrive according to the time schedule, Pakistan had factored in its own calculations, any pressure on the balance of payments will have a very debilitating effect. This will happen if the recent trends in the world oil market continue into the future.

Last week oil climbed to $87 a barrel, the highest level since October 2008. This jump in price occurred after a period of eight months when oil traded between $70--80 a barrel. The oil- producing and exporting countries had expressed satisfaction that oil was being traded within this narrow band. Saudi Arabia, the largest producer and exporter of oil, had indicated that it was comfortable with this price. It satisfied its financial requirement while it was not considered to be disruptive for recovery in the global economy.

The latest surge in oil price appears to be the result of the way the market players are reading the extent and level of recovery from the Great Recession of 2008-09. There is a rising confidence in global economic recovery. The rise in the Dow Jones Index of stock prices in the United States – it crossed the 11,000 mark on April 13, the day the price of oil touched its highest level in recent months – is one of the several indicators of return in confidence. The more optimistic Wall Street players see a further rise in oil prices. According to Barclay Capital oil price will touch $97 a barrel; Morgan Stanley sees the price climbing even higher, to $100 by next year; while Goldman Sachs sees it increasing to $110.

Let us go back for a moment in history in order to understand what may be in store for oil importing countries such as Pakistan. Oil prices first hit $100 in January 2008. They continued on a rising trend, reaching a peak of $147 in July of that year. This meant an increase of 47 per cent in six months. While the shock delivered to the global economy was not as severe as in 1974 and 1979 when price increases resulted from the actions taken by the oil producers and exporters in the Arab world, the effect on the health of the economy in 2008 was severe. This was the case since the global economy was already under great pressure because of the problems in the financial sector.

This time the increase in price is occurring as the global economy is recovering rather than being on the way down. But that notwithstanding, according to Olivier Jakob of Petrometrix, a group that keeps watch over oil prices, “recovery of 2009 was fuelled with crude oil at $62 a barrel, not at $90 a barrel or $100. We fear that the latest run in oil prices will be a kiss of death for the global economy that was trying to avoid a double-dip recession.”

During the earlier period, the United States and other rich countries were able to absorb to some extent price rise since the consumers were able to draw upon home-equity loans and credit cards to finance the increases in petrol and home heating oil. These cushions are no longer available. For most consumers equity in their homes has evaporated because of the decline in house prices and credit card companies are not prepared to offer loans as liberally as they did then. In other words, if the price of oil continues to increase, the effect on them and hence on the economy may be as sharp as was the case two years ago. This was one reason why the prospect of oil-induced recession cannot be altogether ruled out.

In the case of Pakistan the increase in the price of oil will impact in three ways. If there is another global economic downturn, Pakistan will suffer once again by seeing its exports failing to increase at any appreciable rate. This is what happened last time around. Also worrying is a possible increase in the prices of commodities Pakistan must import in order to maintain a reasonable amount of economic activity. But the most severe consequence for the country will be on the price it will have to pay for importing fuel oil, an important source for generating electricity.

It has been two years since Pakistan began to experience shortages of electricity which led to load shedding. This had impacted all sectors of the economy, in particular manufacturing. If anything, the load-shedding duration has increased in most cities and industrial areas. There was an expectation that the government would take some steps to ease the shortage by establishing additional power generation. That has not happened. Some increase in capacity will come through but it will not be sufficient to ease the pressure and the economy will continue to perform poorly.

In spite of the repeated crises Pakistan has been through, the government has still to put together a viable strategy that will take care of the energy needs.. This strategy must address a number of issues. It must settle on what are the most attractive sources of energy. In that context policymakers have to decide how they can use the enormous potential that exists for using hydro resources. Politics has stalled any major effort to tap the waters of the Indus River system for generating electricity.

Several decades ago the UNDP prepared a long-term plan for the realisation of the potential that exists. This assessment needs to be updated. There is also the need to settle on an appropriate institutional structure for managing the generation, transmission and distribution of electricity. Advised by the World Bank, Pakistan spilt these functions and assigned them to separate entities.

In addition a regulatory agency was created for determining the appropriate level of tariffs for consumers. These changes resulted in the break-up of WAPDA. But the logic behind this move was not fully followed through with the consequence that much confusion now prevails. This approach needs to be revisited. There is, in other words, a great deal of policy work that needs to be done to secure Pakistan’s energy future and avoid another recession brought about by an increase in the price of oil.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]New nuclear strategy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][U][CENTER][SIZE="4"]The summit itself turned out to be a tame affair since the Americans had worked hard to achieve a consensus among the participants before they arrived in Washington.[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 21 Apr, 2010[/B]

PAKISTAN was one of the 47 states that participated in the nu clear summit called by President Barack Obama. It was represen ted by Prime Minster Yousuf Raza Gilani who arrived in Wa shington with his hands strength ened by the passage of the 18th Amendment to the constitution.
This will transfer to parliament and through it to him many of the powers wielded by President Asif Ali Zardari. The command of the authority that con trols Pakistan’s nuclear weapons was handed over to him earlier even before the political agreement on the constitu tional amendment was reached.

The nuclear summit was held in Washington and took place after the American president signed a new and far-reaching arms control agreement with his Russian counterpart President Dmitri Medvedev. The signatures were put on the new treaty on April 8 in Prague, the city where President Obama had initially laid out his plans to bring under control the spread of nuclear weapons and material in the world.

The Washington conference was also meant to prepare the way for a major UN gathering scheduled for May at which the parties to the Nuclear NonProliferation Treaty (NPT) would review the NPT with the aim of updating it. Pakistan, not having signed the NPT, will probably be under pressure to accept the main strictures imposed by the treaty.

On the eve of the Washington summit the United States made public the Nuclear Posture Review (NPR), a document that revealed the country’s approach towards the use of nuclear weapons. The NPR took a long time to prepare; there were sharp differences within the administration about the size of the US arsenal and its possible upgrading. The final draft of the review calls for major new investments in nuclear weapons laboratories and facilities to maintain the aging arsenal. However, these weapons would not be upgraded as called for by the strategy developed by President George W. Bush. Pursuing that approach would have gone against the basic purpose. It would have started another arms race. The review also recommends tighter penalties on nuclear rogue states — a matter that would be taken up in New York.

That he would work to make the world a safer place by reducing the number of nuclear weapons around the globe making it difficult for countries that did not have them to acquire them and that he would specify the circumstances in which the US would use them were some of the promises candidate Obama made during his bid for presidency in 2008. This was a difficult posture for a presidential candidate who faced experienced opposition in the fight for his party’s nomination as well as in the presidential election itself.

Both Hillary Clinton, his Democratic challenger, as well as John McCain the Republican candidate were supposed to have a better appreciation of America’s strategic interests than the inexperienced neophyte Barack Obama. The latter won the election, and devising a new nuclear strategy not only for the United States but for the world at large became one of the several matters of deep concern for the new president.

In the first week of April, the president sat down with the press to give an insight into how he wished to conduct his country’s nuclear policy and how he would be pushing other nuclear powers and those who were near to crossing the nuclear threshold to follow suit. He said he intended to revamp the American nuclear strategy to substantially narrow the conditions under which the US would use nuclear weapons.

The country would forswear the use of nuclear weapons against non-nuclear countries. But the president included a major caveat. The countries must be in compliance with their non-proliferation obligations under international treaties. That loophole means that Iran will remain on the potential target list. Iran could be attacked if it developed nuclear weapons since that would be in defiance of the NPT it had signed decades ago.

The new policy specifies that the US weapons are for the purpose of deterrence but does not go as far as the leftwing of the Democratic party wished Obama to go. It wanted the president to take out the option of first-strike altogether; the weapons would only be used if the US was under threat of attack or was actually attacked. Going as far as some of the fellow Democrats wanted him to would have unnerved some of America’s European allies who lived under the US protective nuclear umbrella.

The summit itself turned out to be a relatively tame affair since the Americans had worked hard to achieve consensus among the participants before they arrived in Washington. The communiqué issued after the meeting promised several actions by the participating countries which will be reviewed by a follow-up summit two years later.

The summit accepted President Obama’s goal of securing all loose nuclear materials worldwide within four years. In the summit’s opening session, the American president drew the attention of the world leaders to the threat posed by not fully securing nuclear material. “Nuclear materials that can be sold or stolen and fashioned into nuclear weapons exist in dozens of nations,” he said. He called for action to “lock down” such materials — highly enriched uranium and separated plutonium. “For the sake of our common security, for the sake of our survival, we cannot drift.” Pakistan was in the spotlight throughout the summit having been involved in nuclear proliferation through one of its scientists. While the summit was on some American newspapers revealed that Pakistan had activated a new facility to manufacture additional nuclear weapons material. Also, the impression exists that the government’s repeated assurances notwithstanding, extremists in the country could lay their hands on some of the material the country has accumulated. It was in the light of these concerns that Prime Minister Gilani’s commitment to strengthen port security and prevent nuclear smuggling was well received at the summit.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Reinvigorating agriculture[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 26 Apr, 2010[/B]

One of the major policy changes needed to make is in the area of sectoral priorities. Although Pakistan was born with a rich agricultural heritage, it neglected the sector in order to focus on industrialisation.

The need to develop the industrial sector was underscored by the hostile attitude the first generation of Indian leaders adopted towards Pakistan. Under Jawaharlal Nehru, India’s first prime minister, New Delhi tried hard to economically cripple Pakistan. There was a hope in New Delhi that the new government of Pakistan that was struggling in Karachi to stand on its feet, would fail economically.

Economic pressure could be used to make the Pakistani leadership change its mind about the viability of their new state and about the rationality of partitioning India. Nehru and his associates believed that the Pakistan’s forming establishment may recognise that partitioning British India was a mistake. It might reconsider its position and rejoin India.

Trade was one of the instruments of pressure used by New Delhi. In 1949, India imposed a trade embargo on Pakistan. This action was prompted by Pakistan’s refusal to join India and other members of the British Commonwealth, then called the Sterling Area, to devalue its currency with respect to the dollar.

This changed the rate of exchange between the currencies of India and Pakistan from parity to 144:100 in Pakistan’s favour. India felt humiliated and stopped all trade with Pakistan. Since Pakistan was totally dependent on imports from India of all basic manufactures, the country’s citizens suffered greatly. Pakistan’s leaders responded by undertaking a massive industrialisation drive. The attention given by the government came at the expense of agriculture.

Some economic historians practice what they call the “What if…?” approach to understand how some events or decisions change the course of history. Had some events not occurred (such as Hitler’s defeat by the allied powers) or some decisions had not been taken (such as Nehru’s decision not to accept the Cabinet Mission plan that had received Jinnah’s approval), history would have proceeded in a very different direction.

Applying this approach to Pakistan’s economic history reveals some interesting insights. Had Nehru and his associates not acted with such hostility towards their neighbour, economic relations between the two countries would have remained strong. Trade would have continued to increase and India would have remained the largest destination for Pakistani exports and the largest origin for its imports.

Pakistan would have invested more in agriculture not only to feed its rapidly growing population but to also serve the large Indian market. Agriculture would have retained its position as an important driving force for the economy. But that did not happen.

Could public policy still move agriculture in that direction? There are several initiatives policymakers in Islamabad and various provincial capitals could take that would lend new dynamism to the sector. One of the more important ones is to help farmers to produce for the market. Help has begun to arrive from an unexpected source: the large foreign retail firms that have entered the Pakistani market over the last couple of years have begun to change several aspects of the agricultural economy.

This is particularly the case in processing agricultural produce and marketing it. For them to make profit, they must procure as much as they can from domestic suppliers. They can accomplish a great deal by introducing their business models that rely on hyper-efficient practices and speed the flow of goods and commodities from the producers to the shelves in their stores. There is considerable room for expansion in their activities: modern stores make up just five per cent of the country’s retail industry.

The challenges faced by these stores indicate both the backwardness of agriculture as well as the potential that exists. Buying and transporting produce are difficult tasks because of millions of small-scale farmers who dominate the sector and an agricultural system that is riddled with middlemen.

It is incredible that marketing for many agricultural and livestock products is still governed by the antiquated agricultural marketing acts that have long served their initial purpose. These acts came on the books when the British administration wished to protect the Muslim peasantry from the predatory practices of Hindu and Sikh operators who dominated the marketing sector of the agricultural economy. The non-Muslim middlemen dominated the commercial aspects of agriculture in the areas that now make up Pakistan. They are long gone from the area.

The large retail firms that are establishing themselves in South Asia – Metro and Carrefour have come to Pakistan while Wal-Mart now has operations in India – typically pay 5-7 per cent more than the producers from local wholesale markets. And farmers don’t have to organise and pay to transport their produce; that is picked up by the firms.

The firms are also guiding the producers to improve their productivity. According to a farmer in the Indian state of Punjab who is selling his produce to Wal-Mart, “yields have risen about 25 per cent since he started following farming advice about when to apply fertiliser and which kinds – more zinc, less potash.” There are similar cases in Pakistan which remain to be documented.

Since road infrastructure is weak in Pakistan and other South Asian countries, foreign firms are limiting fruit and vegetable distribution centres to obtain their produce from the farmers that have operations within a radius of 200 km to keep them fresh. By comparison Wal-Mart’s operations in China pick up their produce from farmers within a radius of 400 km. This is the case with such perishable commodities as fish.

According to Metro which is now operating four large outlets – two in Lahore and one each in Islamabad and Faisalabad – it has brought both new production, processing and marketing practices to fish farming and transport of the product from points of production to points of sale. These large firms have also introduced agricultural processed products to various markets in central, eastern and western Europe where they have large operations.

Policymakers have done well to allow foreign retail companies to operate without too many restrictions. This is not the case in India where Wal-Mart had to link up with Bharti Enterprises, an Indian conglomerate that also owns the country’s largest cell phone company, to establish its operations within the confines of the India law.

The companies that have entered Pakistan don’t feel such constraints. Their main concern is with security. Once that issue gets resolved, there is no doubt – given the size of the market n Pakistan, the potential of agriculture, and the country’s geographical location – that their operations will expand considerably.

Pakistan may be at the point where it can begin to realise the remarkable but long neglected potential of its agriculture. As already noted it was the approach adopted by the first generation of Indian leaders that pushed Pakistan in a direction not supported by the country’s endowment. Had Pakistan been able to more fully develop its agriculture – it has, after all the largest contiguous irrigated area in the world – the structure of the economy would have been very different. That may still happen if peace comes to South Asia.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Need for a new paradigm[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 27 Apr, 2010[/B]

PAKISTAN is an economic mess. It is well behind other large Asian countries. In 2010, the Chinese economy is likely to expand at the rate of 8.8 per cent and India’s by 6.7 per cent. Both countries will improve on these rates in 2011.

The Chinese GDP is set to grow by at least 10 per cent; India’s by 8.8 per cent. Both countries have achieved these extraordinary results by integrating, in different ways, parts of their economies with the global system. Even Bangladesh is doing better than Pakistan.

In Pakistan, the situation is very different. The GDP in 2009-10, by official estimates, increased by only two per cent. This increase in national output was slightly more than the increase in population which the government estimates at 1.8 per cent. This means that the incidence of poverty must have increased significantly. The country probably added another five million people to the pool of poverty, bringing its total to 65 million. This translates into 38 per cent of the population of 170 million.

In the current year the government says the GDP increase will be little higher, perhaps three per cent. This may just be enough to keep the total number of poor at 65 million. In the years ahead the rate of growth may begin to increase, bit by bit, reaching five per cent in five years. The rates of growth achieved by China and India are not on the cards for Pakistan. Even at five per cent a year of GDP, the poverty pool may begin to shrink a little but not very much.

These are national averages; the overall GDP growth is being helped by a more rapid increase in some sectors and geographical areas. Conversely there are parts of the country and some sectors of the economy that are performing below the average for the country. Among the better performing areas are perhaps Karachi, Lahore, Islamabad and central Punjab. Among the poorly performing regions are rural Sindh, southern Punjab and most of Balochistan and Khyber Pakhtunkhwa.

What these numbers paint for us is an exceptionally grim picture. It is the picture of a country that is unable to provide adequately for more than three-fourths of its population most of which — but not all of it — lives in backward areas. About 40 million out of 170 million people in Pakistan have succeeded in keeping their living standards from falling. Of these about 15 million have improved their economic situation in spite of the sluggish economy. If this is the right representation of the changes in the social and economic structure of the population, it appears that income distribution in the country must have widened considerably.

We can, in other words, look at Pakistan and its people in two different ways. Geographically there are three areas — backward, stable and relatively prosperous — in the country. Karachi, Lahore, Islamabad, Faisalabad and Hyderabad and the countryside in central Punjab fall in the category of relatively prosperous areas. Even in these there are pockets of extreme poverty.

The middle-sized cities of Punjab and lower Sindh can be regarded as economically stable. Most of the rest of the country can be considered as backward although even here there are pockets of prosperity. The other way of viewing the situation is to use some rough measure of income. Some 15 million can be considered rich; another 25 million as belonging to the upper middle class; another 65 million fall in the category of the lower middle class; the remaining 65 million are desperately poor.

Putting these two pictures together produces a canvas which begins to explain the persistence of militancy and insurgency against the established order in the country. We know from the profiles of the people — men, boys, women and girls — who were persuaded to wear suicide belts that they came from backward areas and belonged to the lower middle class. They were indoctrinated by those who have opted out of the state and challenged the governing order from outside the system.

Such people are prepared to use whichever instrument or method would do the most damage to the existing order, create the most noise, produce the greatest amount of publicity for their cause. Their cause is to produce a new political, economic and social order that is to their liking and the liking of those who have indoctrinated them.

How can this situation be addressed? The use of force is one part of the solution and it has begun to show some results in the areas of the country where it was applied. But the difficult part is the effort to bring the disaffected into the mainstream of economics and politics.

To achieve the latter result Pakistan must move towards a new development paradigm. The one that I have in mind has several elements of which the following four are particularly important. The first is improving the quality of governance. The second focuses effort on improving the country’s resource situation. The third would provide the young with education and skills they can use to enter the economic and social mainstream. The fourth is to make Pakistan a functioning part of the global economic and political system. These four elements of the new development paradigm merit discussion.

There is some progress on the first — the need to improve the quality of governance and bring the state closer to the people. The 18th Amendment to the constitution has done more than go back to the original system. The 1973 Constitution provided the country with a federal system in which the provinces were to have considerable authority over economic issues. This was a promise that was to be fulfilled after a period of political maturation.

The subjects over which the provinces were to exercise total control were lumped together in the ‘concurrent list’ over which during the interim period both the central government and the provinces were to share responsibility. With the constitution amended a stage has been set for bringing about some improvement in Pakistan’s miserable economic situation? I will take up this question next week.

The economic cost
 

The World Bank’s Global Monitoring Report 2010 has acknowledged the economic and financial costs Islamabad has incurred due to the security situation in the country. The report places Pakistan among the conflict-affected countries where political uncertainty and fighting continue to disrupt economic activity.
Two other countries in the region — Afghanistan and Nepal — have found a place in this category. Compared to other nations in South Asia, the report says, these three are expected to face more moderate growth outturns. The report also places Pakistan among those countries whose economic growth has been the weakest because they entered the global crisis with large internal and external imbalances. Countries that entered the crisis with stronger economic fundamentals, such as Bangladesh, Bhutan and India, faced up to the problems better.

Pakistan’s internal security problems have worsened in the aftermath of 9/11. It has experienced more violence, particularly acts of terrorism, in recent years than elsewhere in the region. A recent research paper published by the Lahore University of Management Sciences points out that the per capita incidents (of violence) in Pakistan have increased far more rapidly in the last five years than anywhere in the region, mainly because of the insurgency in the northwest of the country. Even Sri Lanka, once considered to be the most violence-prone nation in South Asia, has recently seen its internal security situation improve after the successful quelling of the Tamil separatist movement.

Islamabad has paid a huge economic price for its role in the war on terror. The direct costs of economic disruptions include rapid increases in internal and external security spending at the expense of education and health. Thousands have lost their lives or suffered permanent or temporary destruction of property. Indirect costs include a slowdown in economic growth and manufactured exports. The country’s image has suffered enormously. Foreign buyers are reluctant to travel here and investors have lost confidence in the country. A government estimate puts the direct and indirect costs incurred by the national economy from 2002-2008, because of the war on terror, at just below $5bn. Concessionary funding from multilateral lenders or grants from friendly countries are no solution to Pakistan’s problem. This kind of assistance only encourages consumption, adding to internal and external imbalances. What we need is investment in our energy sector and manufacturing. We need market access in developed countries for our exports. Our economic woes will not go away unless fresh investments are made in the power and manufacturing sectors for job generation and sustainable growth. But before all that we need to formulate sound policies to restore the investors’ confidence.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Technology-driven growth[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 03 May, 2010[/B]

INITIALLY economists believed that economic growth was the consequence of applying increasing amount of capital and labour to production processes. By capital they meant machines as well as land, the latter being more important in the economies in which agriculture was the most prominent activity.
However, diminishing returns set in beyond a certain point and output per unit of input declined as more and more of the two factors were added to the processes of production. This was one reason why rapidly growing work force in developing countries employed mostly in agriculture did not produce corresponding increases in output. A way had to be found to employ labour in more productive activities. An economy had to industrialise in order to grow.

More recently, economists have concluded that a production function that only has capital and labour as variables does not fully explain economic growth. They brought in two additional factors into play: human development and technology. Human development was also referred to as skill formation. Improving either could improve the rate of economic growth without adding greatly to the stock of capital and labour. Since developed countries had a distinct advantage over those that were still developing in being able to improve their technological base and the levels of skills of their work force, they could still sustain higher growth rate even when fewer and fewer people were able to join the work force.

Even more recently, there is a growing recognition that a new type of technological development is taking place that will give the more populous emerging economies an edge over those that have reached the post-industrial stage. This is aimed at developing products that can reach the markets in the countries that have large populations but still low per capita incomes.

This realization was first applied to marketing by large manufacturers of basic consumer products. Large firms began to see handsome returns if they could package their products in a way that they could be transported at a lower cost and could be sold at a lower unit price. Companies such as Lever Brothers and Proctor and Gamble came out with smaller soaps and shampoos packaged in small plastic bags rather than in large bottles.This way they were able to attract new and relatively less well-to-do customers.

But then manufacturers went a step further. They came to the conclusion that repackaged old products were only a small technological way to develop markets for old and traditional products. What was required were entirely new products. That led to some remarkable innovations by large companies that had their base in large emerging economies.

There are several examples of this approach to manufacturing. One of the most interesting ones is the Nano, a small car that is being marketed in India at a price of $3000 and is likely to take a significant share of the markets in the developing world. The other is a $300 laptop computer developed by Huawei, a Chinese telecommunications, giant that would reach millions of new customers in the developing world.

Some observers of changes in the global economy believe that this development is as significant a revolution as the introduction of the assembly line by Henry Ford in the United States in the early part of the 20th century or the development of lean manufacturing by Toyota in the later part of the same century. But the new innovations are not only being applied to the automobile industry. They are being developed for application in some unexpected areas.

One example is the Narayana Hrudayala Hospital in Bangalore where Devi Shetty, India’s most celebrated heart surgeon, has developed techniques and processes to perform mass surgery. His hospital has 1000 beds and he and his team of four dozen cardiologists are performing 600 open-heart surgeries a week. The hospital charges an average of $2,000 for open heart surgery compared with $20,000 to $100,000 in America, but its success rates are as good as in the best American hospitals.

These developments in the emerging world have been noticed by the firms in more developed countries. Many of them have begun to take advantage of the technological surge in many emerging economies. For instance, of the world’s 500 largest firms, 98 have R&D facilities in China and 63 in India. IBM now employs more people in developing countries than in the United States. Its largest product development facility is no longer in Poughkeepsie, north of New York, but in the vicinity of Beijing. This –devolution of many advanced firms to locations considered appropriate by western and Japanese firms not only helps with the employment of trained people who may not be able to find jobs in the part of the economy run by indigenous firms. It also provides the developing world access to new technologies. This development in the world of technology involving firms in many emerging markets has earned a new epithet: it is being called “frugal innovations”.

This on-going technological revolution is not likely to peter out soon. It is the result of a set of circumstances that are going to be around for a long time to come. First is the sheer size of some of the emerging markets. Between the two, China and India have 2.5 billion people. Of these a billion would be classified as the middle class. They are potential customers of all kinds of manufactured products that were beyond the dreams or imagination of their parents.Their demand is funding the growth of firms that are already giants in their fields. For instance Infosys (an IT services company) and ZTE (a manufacturer of mobile phones) are growing at the rate of 40 per cent a year.

Second firms in emerging markets are bringing in managerial and technical talent from outside the world. Toyota for long did not hire non-Japanese to the senior ranks of its management but companies in countries such as Brazil, China and Indian are bringing the talent from wherever it is available.

Third, technologically savvy firms are expanding outside the borders of the countries in which they are located. In 2007, before the world went into recession, China spent $30 billion acquiring assets abroad. India did even better. It reported spending $35 billion. Brazilian companies are also picking up companies in Europe and the United States Once again Pakistan is missing out on an important development which could quicken the pace of the economic development and help alleviate poverty and improve the distribution of income. No significant technological innovation in the past decade can be attributed to a Pakistani scientist, or a Pakistani engineer or to an institution based in Pakistan.

There are many reasons for this. Of these two are particularly important: neglect by the state to develop skills among the members of the rapidly expanding workforce and neglect, once again by the state, to encourage the development of institutions that can take the lead in technological innovations.

The state needs to step forward with a well developed plan. This should be aimed at improving the technological base of the economy, making research and development (R &D) an important component of the activities of all enterprises, moving the export sector towards the marketing of more knowledge-intensive products, helping the farming community better their processes, move towards the production of crops for which the country has comparative advantage, and provide incentives to all firms to upgrade the levels of skills of their workers.