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  #291  
Old Monday, July 23, 2012
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Pakistan in the role of Asian glue


By Shahid Javed Burki
Published: July 23, 2012


In terms of providing for the economic well-being of its citizens, Pakistan, today, is the poorest performing economy in south Asia. It is not doing well when its performance is measured in terms of a variety of economic and social indicators. It has had a declining rate of growth for almost 50 years. The trend started in 1965, when Pakistan fought a brief war with India over the issue of Kashmir. But punctuating this declining growth trend were a few spurts, each lasting for about three to four years. All of these occurred during military rule and all were associated with large foreign capital flows.

The military leaders were able to access foreign aid since it was consequent upon subscribing to America’s strategic interests in the area around Pakistan. The military rulers had more degrees of freedom to work with foreign governments. They did not feel they needed to be constrained by public opinion. As can be gauged from Pakistan’s difficulties with the US in 2011-12, a democratic government has to take people’s views into account while fashioning foreign policy. As a recent survey by the Pew Research Centre revealed, a very large proportion of people in Pakistan view the US unfavourably compared with other countries in Asia.

Pakistan’s current economic downturn has been extremely severe, lasting longer than any other in its history. It has lasted for five years and is likely to persist for a while. One way of dealing with this situation is to completely reorient the country’s approach to economic development. It needs to focus more on developing strong links with the Asian nations in its neighbourhood rather than continue to seek a close relationship with the US. For some time now, Pakistan has been attempting to negotiate a free trade arrangement, FTA, with the US. That is an impractical approach since Washington has signed FTAs with mostly small nations such as Panama. These countries could be given tariff-free access since they did not pose much threat to America’s domestic industry. For a large country such as Pakistan with one large sector — textiles — the path to an FTA will be slow and will not be particularly rewarding. Instead, this may be a good moment to think about going Asian.

Given Pakistan’s current chaotic situation in both politics and economics, it would be rather presumptuous to suggest that the country could act as the glue for binding different parts of Asia, a large continent, which is now on the move. Several analysts have suggested that the 21st century will be the Asian century; that the extraordinary combination of demography, the role of the state and recent economic history will take Asia forward. The 19th century was the century of Europe and the 20th that of America. This was now the turn of Asia. According to this line of thinking, Asia could, in the not too distant future, overtake both Europe and America in terms of the respective sizes of the economies of these three continents. There is enough dynamism in Asia for several scholars to be comfortable with the thought that such a repositioning of the continental economies is inevitable. However, the pace of change could be quicker and the result more definite if the various Asian countries, large and small, could work together and enable the continent to become a well-connected economic entity with strong inter-country links. Such an outcome could become possible if there was the political will to act on the part of Asia’s large countries. In this context, Pakistan’s role could be critical even when its own economy is very weak at this time.

Some analysts have suggested that rather than one Asia there were, in fact, two Asias, one dominated by China, the other by India. The question was whether the two Asias would converge into a loosely-bound economic entity, or diverge — each part going its own separate way — developing separate economic and political systems and pursuing different goals. There were just too many systemic differences between these two parts of Asia for them to meld together. The state systems in the two anchor economies, China and India, were so different that working together within a common policy framework would not be a practical proposition. China was a highly centralised state. In India’s evolving political system, federating states possessed considerable autonomy, a trend that was weakening the centre. Political systems were also different. China was able to orchestrate regime change in a fairly orderly manner; a process in which it was engaged in now for more than a year and will reach a well-choreographed finale in the spring of 2013. However, the transfer of power in India occurred through elections and the formation of governing coalitions was not always a smooth process. The two countries were headed in quite different directions. Divergence was the more likely outcome.

However, it is, perhaps, even better to think in terms of not one or two Asias but about four rather different parts. This further division of a geographic entity that many would like to see merge into one cohesive economic system certainly complicates the thinking about the future. But looking at Asia from this perspective is more practical and makes it easier to handle the making of public policy. It also makes Pakistan a central player. I will pick up this subject next week.

Source: Pakistan in the role of Asian Glue
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  #292  
Old Monday, August 06, 2012
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Steps towards greater South Asian cooperation



By Shahid Javed Burki
Published: August 6, 2012



Four steps need to be taken towards turning South Asia into a well-integrated economic entity. The first would be to bring Pakistan back into South Asia in the economic sense. If one recalls, the area that is now Pakistan was once an integral part of what was once British India. Back then, Pakistan exported three-fourths of its food and commodity surpluses to India, getting in return about the same proportion of imports from the former. And then politics intervened and with it came suspicion, particularly on the Pakistani side of the border. Following the trade embargo imposed by India in 1949, trade between the two countries dried up. Pakistan turned its back towards India and started looking towards the West. The distant United States became its largest trading partner, defying what trade economists call the ‘gravity model of trade’.

India, in turn, adopted what some analysts call the ‘look east’ policy. The first step, therefore, would be to bring Pakistan back to South Asia and breathe new life into the South Asian Free Trade Area. The process has begun but there should be full commitment from both sides to maintain the momentum. There are groups on both sides of the India-Pakistan divide that have an interest in derailing the process. They must not be allowed to succeed.

The second step should be to open Pakistani space for use by India to trade with Afghanistan and beyond. Once again, there is movement here; a transit agreement is in the works for Afghanistan to trade with India using Pakistani territory. It is the flow of goods in the other direction that Pakistan is hesitant to permit. It is this inhibition that needs to be overcome.

The third step would be to link the various Asian countries through a network of oil and gas pipelines and with an electricity grid so that energy begins to flow from the energy surplus to the energy deficit countries. Some work has been done in this context. A gas pipeline is being constructed on the Iranian side of the border to eventually be linked with Pakistan. The Chinese have long been interested in connecting their western provinces with the gas-rich countries in the Middle East with a pipeline that will cross the length of the Pakistani territory. The private sector in India is planning to lay an oil pipeline from a new refinery located in Bhatinda in the Indian state of Punjab to the Pakistani province of Punjab. This will provide gasoline and other refined products to Pakistan.

It would take a great deal of investment to develop these routes of international commerce. Finding resources for building this type of connectivity is, therefore, the fourth step. Pakistan does not have the means to do this but it can be done with the help of private finance and private technology.

A programme focused on creating a regional network to facilitate trade could be launched. And it should have much greater involvement of the private enterprise. This is where an Asian centre of finance such as Singapore may enter the picture. It has the banking sector and other instruments of finance to establish a financial consortia to implement such a project. It also has a large and experienced construction industry to join such an effort. A city-state such as Singapore may well become the headquarter of a large consortium to handle these infrastructure projects.

Insofar as the financing of such an investment programme is concerned, there are several possibilities. The traditional sources would be the two multilateral development banks, the World Bank and the Asian Development Bank. To this, two more could be added. The BRICS countries are now working on the possibility of setting up a development bank of their own, which would be capitalised by them from their large external reserves. Large inter-country infrastructure construction projects would be a good starting point for the proposed BRICS bank.

In sum, it is possible to create a vibrant economic entity in South Asia. What is needed is political will and imagination on the part of various countries that would be involved.

Source: Steps towards greater South Asian Co-operation
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  #293  
Old Monday, August 13, 2012
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Crisis in policymaking



By Shahid Javed Burki
Published: August 13, 2012


The situation in Pakistan is now precarious. There is a consensus both inside and outside the country that most systems, economic as well as political, are dysfunctional. But as economists now emphasise, an economy not supported by an appropriate institutional framework cannot expect to have a reasonable rate of economic growth, cannot provide adequate services to the citizenry, cannot alleviate poverty and cannot reduce income inequalities.

There are many things wrong with official thinking about the state of the Pakistani economy. Some useful material was produced at the Planning Commission. What the Planning Commission called the Framework for Economic Growth, or FEG, has some innovative material. It is right to focus on what it labels the “soft side” of the development equation. The Commission has claimed that for Pakistan to increase the rate of economic growth, it needs to invest in the softer aspects of development and not continue to commit large sums of public money on brick and mortar development schemes that have, in the past, dominated the Public Sector Development Plan.

The “soft side” advocated by the Planning Commission includes institution building, human resource development, increasing the capacity of the private sector to innovate, reducing the regulatory burden carried by private enterprise and changing and modernising urban regulation so that cities become the most dynamic part of the economy. The Commission is also concerned about the declining efficiency and effectiveness of the various civil services. It has called for a fundamental restructuring and reform of the civil administration. All these are worthwhile goals and they needed to be included in an approach aimed at the long term. However, they don’t constitute a strategy that could pull Pakistan out of the deep economic hole it has dug for itself.

The FEG is an approach that will deliver rewards over the long term. It will do very little to solve Pakistan’s current economic problems. Following are some of the many problems crying out for policymaking attention, listed in no particular order: Pakistan’s longest lasting recession with no end in sight; continuing violence, some of it directed at the state; increasing isolation from the world; continued dependence on external capital flows for financing low levels of public-sector investments; the loss of confidence on the part of the investment community, both inside and outside the country, in Pakistan’s economic future; low rates of domestic savings and low tax-to-GDP ratio; very little public-sector investment in improving the quality of the large human resource; declining share in international trade; poor relations between the federal government and provincial administrations; and increasing incidence of public sector corruption.

Pakistan is now regarded as a fragile state by development institutions such as the World Bank. In one of its recent World Development Reports, the Bank also picked up some of the soft factors in the growth function. These, it suggested, are essential ingredients of long-term sustainable development. But it emphasised — correctly I believe — that it will take a generation or two, before fragile economies such as Pakistan can begin to use these factors effectively in the development equation. In the meantime, they need to pull their economies out of the low growth traps into which they have fallen. To get to the long term, they need to focus on the short term.

What should be the development agenda for the policymakers at this delicate moment in the country’s economic history? There are at least five areas that need the policymakers’ urgent attention: revival of growth; increasing domestic resource mobilisation; reconnecting the country with the world; reducing income disparities; and investing in the development of the large human resource. Each of these areas requires a series of government actions. There are no indications that any of these are planned. What needs to be done in one area will impact on the remaining four. In other words, a comprehensive approach that dealt with the short-term is the need of this precarious hour. Long-term thinking could wait while the short term was being fixed.

Source: Crisis in Policymaking
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  #294  
Old Thursday, August 23, 2012
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Political parties and economic development



By Shahid Javed Burki
Published: August 20, 2012


The growing literature on how politics interacts with economics places particular emphasis on the development of political parties within political systems. The parties serve several economic functions. They bring together those in society who share ideologies, values and views about the direction that should be taken by the state that governs the society. Well-organised parties can influence the making of public policy. A good example of this in the context of Pakistan is the rise of the All-India Muslim League (AIML), founded in 1906 in Dhaka. There was some anxiety on the part of the Muslims in British India that a Hindu-dominated independent country that would be the consequence of the British departure would be less than fair to them. The AIML, therefore, was motivated by economic interests of the community it represented. Over time, it focused on only one demand: the creation of an independent state for the Muslims of British India. Once that demand was met, the rechristened AIML as the Pakistan Muslim League (PML) lost its raison d’être and morphed into a number of different organisations.

Pakistan’s political landscape was transformed in 1968 when Zulfikar Ali Bhutto founded the Pakistan Peoples’ Party (PPP) as a national organisation with a socialist agenda. It won the most seats in the National Assembly allocated to West Pakistan in the elections held in December 1970. A year later, it formed the first PPP-dominated government in the part of the country that was left after the separation of East Pakistan. But the success of the separatist movement in what was once Pakistan’s eastern wing encouraged the establishment of political organisations promoting narrow regional interests. For a number of years, Pakistan’s political landscape was dominated by national parties — the PML, the PPP and the Jamaat-e-Islami. However, the rise of regional parties complicated the making of economic policies especially when regional interests could not be reconciled with national priorities.

The PML’s political monopoly was broken when in the election of 1954 in East Bengal, the Muslim League was trounced by a coalition of parties that had assembled under the banner of the United Front. The name given to the coalition was suggestive of its Marxist orientation and combined religion with a socialist orientation. The group included Fazlul Haq who had joined hands with Mohammad Ali Jinnah and campaigned for the establishment of Pakistan. The success of regionalism as reflected in the lopsided victory of the United Front when it won 300 seats versus the 10 secured by the PML became the inspiration for the development of a number of narrowly focused regional parties. The most successful of these efforts was the Muttahida Qaumi Movement (MQM) as well as the Awami National Party (ANP). The names of these parties signified national aspirations rather than purely regional interests and were to have profound impact on the formulation of national economic strategies.

One example of this was the position taken by the MQM with reference to the design of fiscal policy. The MQM represented the Sindh urban middle class, which was reluctant to see its tax burden increase while the landed community was mostly spared. In 1973, when Bhutto was engaged in drafting the Constitution, he won support of the powerful landed interests by excluding agricultural incomes from the tax base. This provision had serious economic consequences. For most of the time, value added in agriculture increased impressively but this growth could not be captured in tax revenues. The attempt by the IMF to increase the tax-to-GDP ratio as a part of the programme it negotiated with Islamabad in 2008 did not succeed. The Fund’s proposal to levy a tax on consumption was resisted by the MQM. Its opposition resulted in the collapse of the IMF programme in 2011.

We may be witnessing another shake-up in the institutional structure of politics in Pakistan. The rise of Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) may bring another national force in play that will focus on the country rather than on narrow regional interests. The coming electoral competition between three or four national groupings — the PPP, the two Muslim Leagues and the PTI — will have significant economic consequences. If they score big victories in both the central and provincial elections, they may be able to swamp the regional parties. That will make the formulation of economic strategies that keep national interests in their sight become somewhat easier and practical.

Source: Political Parties and Economic Development
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  #295  
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Politics and economics: a theoretical perspective


By Shahid Javed Burki
Published: August 28, 2012


That economic development affects politics and vice versa are two beliefs that have been at the centre of academic discourse for a long time. The way politics and economics interact with each other was investigated with some thoroughness by a number of scholars in the 1960s. Among them was an economist, Gunar Mydral, who won the Nobel Prize in Economics for his efforts, a political scientist, Samuel P Huntington, who had a profound impact on Western thinking about Islam and a political-economist, Albert O Hirschman, who laboured hard to bring political science into economics and business management.

More recently, one sociologist, one political scientist and one economist have joined the ranks of these three scholars in analysing the process of economic and political change. The sociologist, Francis Fukuyama, is currently engaged in studying the development and decay of what he calls the “political order”. The other work to which I will make reference is by Daron Acemoglu, an economist at MIT, and James Robinson a political scientist at Harvard University, called Why Nations Fail.

Several ideas from the works of these analysts have relevance for understanding Pakistan’s economic and political development. Among the questions are: why has political and economic power remained concentrated in the hands of a handful of groups in Pakistani society? And why has the society resisted change that would take it towards modernisation?

Myrdal famously coined the word “the soft Asian state” to explain why in many post-colonial countries in Asia the state did not act as if it had the power and authority to overcome the interests of several strong vested groups. To allow so much power to be accumulated in so few hands was done by colonial rulers for the purpose of having well-entrenched groups in Indian society develop strong loyalty towards the British Raj. Shaken by the Great Mutiny of 1857, the colonial masters of India chose the Muslims of the northern provinces to shoulder some of their security burdens. They did this by bringing Punjabis and Pathans into the British Indian Army in large numbers, by allowing some members of the carefully identified communities of northern India become important players in the elaborate bureaucratic structure that was established and by developing a system of rewards to recognise those who showed great loyalty towards the British rule. In return, the rulers put on the books a large number of laws that protected Muslim landowners from losing their land to Hindu moneylenders. They also restricted the role of middlemen in agriculture to those the state favoured. By dividing Indian society into martial and non-martial races, the British allowed only a few communities to find employment in the armed forces.

Most of these groups were not particularly keen on the idea of a separate homeland for the Muslims of India. Once the idea of Pakistan became a reality, these groups devoted their immense energy and resources to protect their economic and political interests. They had little interest in developing the Pakistani state based on a rule of law. They kept the state “soft” so that it remained under their control. They, in other words, became members of what Acemoglu and Robinson call an “extractive system”. This is a system that has its own rules, very different from those that must govern a modern political entity. The main goal of the extractive systems is to extract as much political power and material wealth from the rest of the society as possible. In the Acemoglu-Robinson formulation on the other side of the politico-economic spectrum are the “inclusive systems”, which allow political and economic power to be very broadly shared. The extractive systems work on the basis of informal rules while the inclusive systems follow formal rules such as those embedded in the constitutions that modern societies write for themselves to regulate individual and community behaviour. Can societies transit from the exclusive to the inclusive state? Can this be done by an independent judiciary? Can elections be the way to bring about this change? I will answer these questions next week.

Source: Politics and Economics
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  #296  
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Post Moving out of the slump

Moving out of the slump



By Shahid Javed Burki
September 3, 2012


I have long held the view that the economic circumstances of a country — the problem it faces, its future prospects and the public policy choices leadership groups are likely to make — cannot be understood without developing a good appreciation of the structure of the society and the operating political system. Most under-performing economies have a lot of slack in the system. This can lead to better economic performance if the capital that has already been invested in the economy is put to more efficient use and if the workers that are engaged in low productivity activities are able to move to those that have higher personal as well as societal rates of returns. Once the economy begins to recover, the pace of growth can be sustained for a long period of time.

That was the experience of India. Following the reforms instituted in 1991, the Indian economy left the path of what the country’s own economists called “the Hindu rate of growth”. The country quickly climbed on to a new growth trajectory that produced an average rate of increase in national output that was twice the Hindu rate of growth. In the 44-year period from 1947 to 1991, the average rate of increase in national income was 3.5 per cent a year. Since then, it has averaged 7.3 percent per annum. Several Latin American countries went through the same kind of experience, quickly recovering from slumps once the right set of policies ware put in place.

Pakistan also had periods of growth spurts that took the economic rate of growth close to 7 percent a year. This happened during the first half of the rule by President Ayub Khan; it happened again in 1982-89 when the country was governed by General Ziaul Haq; and it happened for the third time in 2001-07 during the presidency of General Pervez Musharraf. But it is important to understand that these were essentially deviations from the trend line; they were not the consequence of structural changes that could sustain high rates of growth over the long-run.

The Ayub model — in contrast to the one India had followed — gave considerable space to private enterprise. The government’s role was limited to providing encouragement, access to capital and investment in creating supporting infrastructure. It was during this period that a multibillion dollar investment programme was completed that included the building of two large dams. These works improved the already well-developed irrigation system and significantly increased hydro-power generation.

What should be the content of the policies to be adopted in order to move the economy on to a growth path much higher than the one it is on at this time? At this point, and once again relying on my work experience, I would make three observations. The first relates to the restoration of confidence in the country’s future among different segments of the population. Economies generally respond to the signals the policymakers give. At this time, the signal is that of indifference to the economy. There is anecdotal evidence of considerable amount of capital flight from the country because of the growing belief that Pakistan is not a safe place in which to keep money.

However, there will be a positive response if a different signal were to go out. Some of the capital that has left the country will come back if an impression was created that those who hold the reins of power would not spare any effort to put the economy back on track. More capital would be kept at home rather than taken outside the country. This could increase the rate of domestic investment by as much as two percentage points a year, resulting in adding half a percentage point to GDP growth rate.

The needed policy framework should be divided in two parts; one for the near-term, say the next three years and the other for the medium-term, say the next three to eight years. The programme for the near-term should focus on institutional reform aimed, to begin with, at three areas. The first and by far the most urgent is reform of the fiscal system by levying a consumption tax, incorporating the taxes on incomes that are outside the reach of the taxman, and improving the system of collection. How all this could be done has been detailed in a number of studies various individuals and development institutions have carried out for the government over the last several years. The second area would be to reform the system of accountability by giving its leadership autonomy and protection. The third part of the immediate effort should be to reform the civil service system. Again, this is an area of reform into which a great deal of thinking has already gone. These efforts should result in increasing investments and adding 2.5 percentage points to the growth rate bringing it to 6.5 percent by 2016.

For the longer term impact, four more areas will need to receive attention. They include easing the shortage of energy, both electricity and gas; improving the security situation; increasing trade with India; and incorporating six ‘positives’ in a grand development strategy. My list of positives is: agriculture, an engineering industry made up of thousands of small and medium enterprises; the demographic dividend; devolution of power from the centre to the provinces; arrival of one million well educated and trained women in into the work force; and the presence of large Pakistan diasporas in three continents. Such initiatives could increase the rate of economic growth to eight per cent by 2020, adding another 1.5 percentage points.

Source: Moving Out of the Slump
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  #297  
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Reviving the crumbling state



By Shahid Javed Burki
September 9, 2012


The Pakistani state is crumbling; it needs to be revived. It is crumbling since it is failing to provide the citizens what they need the most — basic services. The institutions that make up the state are in disarray and we know from the experiences of other countries that once institutions become dysfunctional if it takes a long time to get them to work again. Why is the Pakistani situation so dire? There are several answers and all of them need to be factored into the policies of those who would like to see Pakistan working again. This is the season to reflect on what is happening to the Pakistani state. This is the right time to think about this problem since both the people and those who wish to lead them are preparing for another set of elections. An opportunity will be given to the people to choose their rulers at both the federal and the provincial levels.

For several years now, economists have been saying that it takes more than capital and labour to produce growth. Institutions are one of those things that need to be brought into the development equation. When economists talk about institutions, they don’t necessarily mean organisations with well-defined structures and business plans. They mean rules, both formal and informal that people follow in order to deal with one another. They also mean enforcement mechanisms, when established rules are defied. A legal system that has well-written laws and courts, and a system of regulations that are overseen by their own organisational structures, it ensures compliance. Culture and societal norms ensure compliance of informal rules. One example of the latter is what anthropologists call “vartan bhanji” — the system that enforces giving, in order to celebrate or observe life’s many passages. For instance, people are expected to give on weddings keeping in mind what they have received themselves.

The problem arises when informal rules begin to overwhelm those that are formal; when culture begins to mean more than formal laws and regulations. This is one of the more serious problems Pakistan faces today. It is slipping back from formality to informality. Political scientists have begun to emphasise that political development is not a linear, unidirectional process. Development happens when formal rules become more important for transactions than those that are informal. In that case, political decay rather than political development takes place.

If the preceding sounds too negative, let me bring into this discussion something that is positive. There is no doubt that in spite of the political roller coaster we have been riding since independence was gained 65 years ago, there is now some forward movement. That the military, by repeatedly intervening in the political process, set back political development seems to have withdrawn to the barracks. It is not being asked to come back and save the country and provide the citizens what they want from the state. There is now consensus in the country that the only solution to the many problems that must be dealt with is through the political process.

There is also consensus that the state must function at several different levels — the federal, the provincial and the local. The Eighteenth Amendment to the Constitution has provided the framework that brings the state one step closer to the people. Powerful political leaders in the past and the military with a strong preference for centralised command and control had established styles of governance that made the state very distant from the people. However, the full impact of the amendment has as yet to be felt but it will generally be positive. However, the devolution must not stop at the provincial level. It must continue down to the local levels. Many services can only be provided effectively and efficiently when those who are receiving them can literally see who are supplying them. This is one reason why institutional economists have begun to emphasise what they call ‘localisation’ in the process of governance.

The third positive is the increasing power that is being claimed by institutions that can provide, what in the American system are called, ‘checks and balances’. These institutions have to keep in check and in balance the enormous amount of power all political systems give to the government’s executive branch. This usually comes from a combination of the legislative and judicial branches. In Pakistan, however, the legislature remains weak, in part, because political parties remain seriously underdeveloped. Legislative weakness has brought the judiciary forward filling the gap that exits for all to see. But there is another check on all branches of government that has assumed an increasing role. This is the power of the civil society, often expressed by the use of the ‘street’. If there is a lesson to be drawn from the Arab Spring, it is this: the citizenry will push back after a certain point has been reached. There is a reason why all the deprivation that Pakistan’s citizens have experienced for the last several months has not caused an explosion in the street. The reason is that people have developed some confidence in the political process.

The main conclusion that I have to offer is that while the state is becoming increasingly dysfunctional, political evolution since 2008 offers some hope. People must demand solutions for rebuilding the crumbling state from the political parties that will compete in the coming elections.

Source: Reviving the Crumbling State
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Know thy neighbour



By Shahid Javed Burki
September 17, 2012


The recent visit by the Indian Foreign Minister, SM Krishna, to Islamabad and the indication that Pakistan may finally get a visit from the Indian Prime Minister, Manmohan Singh, are clear indications that the process of economic and trade normalisation is proceeding slowly but reasonably smoothly. There are three aspects of this process that need some consideration and will be the subject of the article today, and a couple that will follow thereafter. The first is that most of the advances have been made at the political level. The decision to move the process forward was taken at an informal meeting of the Indian prime minister and Pakistani President Asif Ali Zardari, a few months ago. Most of the work related to normalisation was done by the ministries of foreign affairs in the two countries. There was relatively little involvement of the technical people and institutions.

The second important aspect of this process is that the Indian states and the Pakistani provinces that would be affected as normalisation proceeds have not been directly involved in the discussions. When the bulk of the trade begins to flow over land-routes, the provinces on the Pakistani side of the border and the states on the Indian side will need to be included in the contemplated changes. Third, a framework will be needed to move the process forward. It is interesting that much of the work that has been done, to-date, was undertaken outside the Saarc and South Asian Free trade Area arrangements. However, if the process also brings in countries other than India and Pakistan, as it must, a multilateral framework would be required.

Now that India and Pakistan are inching towards closer economic relations, it would be useful if each country understood well how the policymaking process works across the border. The Indian system has been democratic virtually from the day the country started out as an independent state. Pakistan, on the other hand, has ridden a political roller coaster, trying and discarding many systems. It is only during the five-year period since the beginning of 2008 that a durable democratic political order has been shaped. Both countries are now democratic, India more so than Pakistan. Both are evolving rapidly but in doing so are moving in different directions. It is important to understand where they are going in order to appreciate the relationship that will develop over time in the area of economics.

As political scientists point out, calling a political system democratic means more than recognising that those who wield policymaking power do so as the elected representatives of the people. Holding periodic elections to choose those who will govern is only one part of the political process. A political order is also defined by the location of the policymakers. This is what distinguishes a highly centralised system from the one that is federal. At this point in time, both India and Pakistan are federal systems but that is where the similarity ends. Political power is much more disbursed in India than is the case in Pakistan. This difference will deeply impact the development of economic ties between the two countries as they evolve.

The states in India at this time are important economic actors. The economic choices they make are determined more by the local political establishment than by those who govern in New Delhi. This is one reason why there are vast differences in the economic performance of the states, as well as in the economic systems that have been adopted by them. Gujarat, for instance, has given the private sector much greater space within which it can operate. West Bengal, on the other hand, has a much more intrusive government. This reflects the very different histories of the two states. Gujarat has some well-established industrial and business houses that became prominent players, not only in the state, but in all of India. West Bengal was long governed by a coalition of Left parties led by the Communist Party of India (Marxist), which saw the government as the leading player in the economy.

In Pakistan, in spite of the passage of the Eighteenth Amendment to the Constitution that allowed the provinces much greater authority in economic matters, policymaking has remained highly centralised. Not only does Islamabad remain the most important policymaker, most important policies are taken by the presidency. If the Eighteenth Amendment were to be interpreted literally, it would have created a presidency akin to the one that exists across the border in India. The president would have become a figure head, with most of the power in the hands of the prime minister, answerable to parliament. That has not happened. In India, the constitution also sees the prime minister as the most important policymaker. That, however, is not the case at present. Much of the power resides in the hands of the leader of the Congress Party that governs as the leader of the ruling coalition in New Delhi. In both cases, these are departures from the Constitutions that clearly give governing authority to the head of the government — the prime minister — not the head of the state; which is the president. Why that has happened is an important answer to determine in order to understand which way the two systems may be proceeding. I will take up this question next week.


Source: Know thy Neighbour
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Pakistan’s lessons from India



By Shahid Javed Burki
September 24, 2012


Looking at India will be of enormous help for fashioning Pakistan’s political order. Not to imply that Pakistan should follow what India is doing, but there are some lessons from what happened to India’s political system as it evolved.

As Pakistan stumbled from one political crisis to another, many looked with envy at what the Indians had achieved — they managed to create a political system that worked reasonably well for a country much more diverse than Pakistan. That happened for basically two reasons. The first was leadership continuity during the country’s formative years. From 1947 to 1964, India was governed essentially by one man: former prime minister Jawaharlal Nehru. He was not only one of the founding fathers of India but was also a committed democrat. The second reason for India’s more robust political development was that unlike the Pakistan Muslim League (PML), the Congress Party in India did not lose its raison d’être the moment the country won independence.

The PML was a one-issue party. As the All-India Muslim League, its predecessor, it had only one mission: the establishment of a separate homeland for the Muslims of British India. Once that was achieved, the party failed to redefine itself. It floundered. The Congress Party had a more ambitious political agenda: to end colonial rule, keep India united and create a political, social and economic system that would improve the well-being of the common Indian citizen. The two major leaders of the pre-independence India had two very different ideologies for achieving the third objective. MK Gandhi wanted to do it by returning India to its traditions in which the citizen’s welfare was based on the work of small communities, essentially villages or “little republics”. Nehru, on the other hand, wanted to bring European socialism into India. The Soviet Union became his model as he began to shape public economic policies.

The Congress continued to dominate the political system for half a century but then, because of the way the party itself was governed, a number of regional parties emerged to challenge it. The Indian system developed and, as pointed out by Pratap Bahnu Mehta in a recent Foreign Affairs article, “Indian politicians and bureaucrats all shared four basic management principles — vertical accountability, wide discretion, secrecy and centralisation — all of which made for a government that was representative but not responsive”. The two principles that mattered most were the fact that leaders at all levels of the system looked up to the person at the very top. Most of the time, the top person was the prime minister. The second principle was centralisation. The party was governed from New Delhi.

Several similarities exist between the way the two mainstream political parties are governed in Pakistan and the governance of India’s Congress party. Both the PPP and the PML-N are dominated by a single leader who commands total loyalty and runs a highly centralised organisation. As a result, both have left space for the regional parties to gain power in some parts of the country. However, in Pakistan, there is still space between national and regional parties that can be occupied by a relatively new national organisation. The Pakistan Tehreek-e-Insaf has gained some traction as the citizens have lost some confidence in the established parties.

To the four principles mentioned by Pratap Mehta as the bases on which the Indian system was built, a fifth needs to be added, particularly on the economic side. The Indian system, to a large extent, is self-correcting. This is because for endurance, it must respond to the pressure by the citizenry for change. This affects both the economic and political components of the system. But the change comes after a lag; it took many years before the government stepped out of the way of the private sector. Nehru had placed the state on the commanding heights of the economy which produced the “Hindu rate of growth” for four decades. This experience taught the policymakers that excessive intervention by the state, as practised during the Nehru years, resulted in the economy growing at a rate much lower than its potential.

What does the Indian experience tell us about Pakistan’s likely political development and how it might affect our economy? I will take up this question next week.

Source: Pakistan's Lessons from India
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Who will own the system?



By Shahid Javed Burki
October 1st, 2012



There is, at this delicate moment in Pakistan’s history, a big question that must find an answer: who will own the new political order that is in the process of being shaped and how will that ownership be exercised? In the last few articles, I have been comparing Pakistan’s political development with that of India and will respond to this question first in the Indian context.

India is a more diverse country than Pakistan and yet, it has developed a consensus on how it should be governed. Its constitution, adopted in 1950, is based on two simple but powerful premises: that the will of the people must prevail and the rights of all communities must be fully protected. India can be justly proud of the fact that its head of government is a Sikh belonging to a religious community that once rebelled against the state and since then, has been fully accommodated in the political system. While it often deviates from these two rules, what is attractive about the Indian system is that it has the ability to return to the old established norms.

Today, the Indian system is faced with at least one big challenge: the slow death of national parties. The Congress has found it difficult to climb out of the dynastic mould. It is widely expected that the fourth generation in the Nehru-Gandhi family will take command of the party and the government when Sonia Gandhi and Manmohan Singh pass from the scene. The Bharatiya Janata Party (BJP) is finding its ideological foundation to be a weak force for building a national base. The progressive failure of the national parties has created space for those with strong regional interests. The inevitable tension between the regional and national parties has made it very hard to formulate economic policies that are aimed at national rather than regional objectives. Prime Minister Manmoham Singh’s latest set of economic reforms has run into predictable regional opposition.

Whether New Delhi will persist with them will determine the future of the Indian political order.

Now let me turn to the case of Pakistan and the evolution of its political system. There are a number of contending forces in the country as well. Some of these don’t hesitate to use violence to get their way. Islamists and secularists have their views and are vying for influence, the former by using threats and intimidation to gain support. It was this group that assassinated Punjab governor Salmaan Taseer in January 2011 for expressing secularist views about the incarceration of a poor Christian woman on charges of blasphemy. Regional and separatist forces are fighting the weakened state, seeking to control the people who live in their territories and establish a claim on the resources that are yet to be exploited in these areas. Sectarianism is now a force with each faction within the same faith claiming to be in possession of the full truth. Religious minorities are being hounded to gain political ground. It is clear that the forces that seek to divide rather than unite will use whichever opportunity arises to get their way. It was not bad policing that produced mayhem in Pakistan following the airing of a YouTube video that disparaged the prophet of Islam in mid-September. A score of people died so that those who excited them could gain additional political ground.

Religion has become the battleground in Pakistan. In India, the failure of the BJP to use the Hindu identity to define national politics pushed religion to the background. That has not happened in Pakistan. A fully democratic order that respects the rule of law is the only way to bring together different forces and get them to resolve their differences through the ballot box and from the floors of the national and provincial assemblies. Once a law is placed on the books, there must not be any deviation from it, in particular by those who hold the reins of power. The law, for instance, does not permit any individual — certainly not a federal minister — to urge the murder of a person who may have hurt the sensitivities of those who follow his faith. This was precisely what was done by the minister in charge of railways when he announced a reward of $100,000 for the murder of the man behind the YouTube video.

Will Pakistan be able to reconcile the deep devotion to Islam as the faith of the country’s majority with the demands of a political order based on accommodating different views not only about religion but on other issues that lie in the domain of public policy?

Source: Who will own the system?
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