[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]At the edge of an abyss[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 04 May, 2010[/B]

Pakistan's current economic situation calls for a fundamental change in the way the economy has been managed over the last couple of decades. Much has been said and written about the mistakes made by Islamabad’s policymakers during that period.

Relatively little has been suggested about the way the economy should be pulled back from the edge of the abyss where it stands today.

Unless the government takes stock of the current situation and carefully assesses the future, there is a real possibility that we will fall behind all the countries in the region if not into the abyss itself. There is also considerable danger of social chaos if the situation people face is not urgently addressed. Thanks to an open and aggressive media, people are becoming increasingly aware of their predicament in a regional context.

That Pakistan is the South Asian ‘sick man’ today was underscored by a report released to the public by the World Bank on the eve of the institution’s spring meetings held in Washington a couple of weeks ago. The Pakistani delegation to the meeting was led by the new de facto finance minister, Dr Hafeez Sheikh. According to the report all South Asian economies with, the exception of Pakistan and Afghanistan, have pulled out of the partial slowdown caused by the Great Recession of 2008-09. Even Nepal, which has had its share of economic and political problems, is expected to do better than Pakistan in terms of economic expansion.

In the World Bank Global Monitoring Report 2010, South Asia’s GDP growth rate is expected to increase to seven per cent in 2010 and 7.4 per cent in 2011. India will lead the way in this resurgence followed by Bangladesh. India’s projected performance is particularly impressive. It will approach a GDP growth rate of nine per cent which means an increase of 7.5 per cent in the country’s per capita income. Even some of the laggard states in India are being pulled out of economic stagnation and are joining those that are performing well. Bihar, for instance, will see its economy grow by 11 per cent in 2010. It has been the slowest growing state in the Indian Union and also the poorest.

A number of factors will contribute to the pick-up in India. The most remarkable of them will be the steady increase in the domestic savings rate which will draw close to 40 per cent of GDP, the level achieved by fast-growing economies such as China. This makes India considerably less dependent on external capital than Pakistan. India will also benefit from the pick-up in international trade. Unlike its previous record, exports will become more diversified with manufacturing joining services as the sectors responsible for growth.

In the past India’s IT sector had pulled the rest of the economy towards modernisation. Now manufacturing has become another area of dynamism. The source of the impressive performance of manufacturing in international trade will be based on exports that make use of some extraordinary technological developments. A small motor car brought to the market by Tata Motors is one example of this development. Called the Nano, it is designed entirely by Indian engineers, uses mostly Indian materials and inputs and is meant to be driven on the country’s depleted roads. The car is expected to do well in other parts of the world that have a growing demand for cheap and sturdy models. Nano sells for only $3,000.

India will also continue to develop new markets for exports. China has emerged as the country’s largest trading partner, buying mostly commodities of which India has abundant supplies, China, becoming increasingly dependent on material inputs for feeding its expanding industry, is turning to India for such important inputs as coal and iron ore. The point of making these observations about this happy economic situation in India is to emphasise the important role the state can play in helping the economy to grow and for people to enjoy the fruits of development. India may have been in a more advantageous position when it, together with Pakistan, acquired independence from the British in 1947. But through the use of disciplined state action in the 1960s, Pakistan brought itself to India’s level. Not only did it close the income gap with India, for about a decade and a half, it was treated as a model of economic success. That, of course, is no longer the case.

At that time India was labouring under what was called the Hindu rate of growth, above three per cent per annum. Pakistan at that point was growing at a rate twice as high: six per cent a year. Even then Pakistan had a higher rate of population growth. In spite of that its per capita income increased at a rate 75 per cent higher than that of its neighbour. Pakistan then overtook India as South Asia’s most prosperous economy.

If we were to search for the one reason why the country has been standing at the edge of a social and economic abyss, it will have to be the failure of the establishment to provide what is loosely described as ‘good governance’. By good governance is meant a number of different things; effectiveness of the various parts of the administration to provide for people’s varied needs; effectiveness, also, of the legal system and the judiciary to provide speedy justice to the people in civil and criminal matters; and reducing the level and incidence of corruption.

Without moves such as these Pakistan will not be able to pull back from the edge of the abyss where it stands today. The passage of the 18th Amendment has set the stage for bringing about improvement in this context. One can only hope that the opportunity that has become available will not be lost as several others were missed in the past. If policymakers continue to dither, the consequences may be too grim to contemplate.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Trade troubles in the neighbourhood[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 10 May, 2010[/B]

There are several things unique about Pakistan’s economic situation. One of the more positive ones is that it is the only country of a significant size that borders on two mega states, China and India.

Bhutan and Nepal also border the two countries but they have relatively small economies. The gravity model of trade popular with most economists tells us that size and distance matter in determining important trading partners. Applied to Pakistan’s case that model would have China and India as the most important origins of Pakistan’s imports and the most important destinations for its exports.

But for a variety of reasons that did not happen. Most of them were of political nature. Instead, at this time, the United States is the country’s largest trading partner. That too is for political reasons.

That notwithstanding, the dynamics of the Asian region are changing in such a way that Pakistan could be drawn into this expanding economic area and begin to benefit itself. China and India are the world’s most rapidly growing economies. In 2010, China is expected to see its GDP increase by more than 10 per cent; India by eight per cent.

Now with 1.34 billion people and with per capita income of $6,500 in purchasing parity terms, China’s GDP is estimated at $8.7 trillion. In 2010, its population is estimated at 1.17 billion and its income per capita at $3,320. This means that the size of the economy is $3.88 trillion.

One of the important recent developments in recent years is the sharp increase in trade between China and India. If some of this was to be conducted over land and if Pakistan agreed to grant transit rights to India to move its products through its territory to the countries on its borders, there would be considerable benefit available to it.

The “ifs” involved in this statement are many including the possibility that the trade between China and India would remain free of frictions. That has not been the case, particularly in recent months.

Recently, India has begun to impose restrictions on the import of telecommunications equipment from China Beijing has aggressively developed its capacity to export telecommunications equipment deeply penetrating the South Asian markets. India is not the only country. China is attempting to penetrate using technology and the products that have special significance for emerging markets.

China’s Zong telecom has not only entered Pakistan; it is making deep inroads into the country’s market. It has grabbed a significant share of the market and has done so at the expense of a number of foreign suppliers who have been much longer in the country. Pakistan now has one of the large mobile telephone markets in Asia with a penetration ratio higher than that achieved by India. It had 95.54 million customers in 2009 for a population then of 162 million which implies a penetration ratio of close to 60 per cent. China was very helpful in developing this industry. Zong now has 6.48 million customers. There are now discussions going for the manufacture of cheap Chinese mobile phones and personal computers in Pakistan.

While the Chinese have not been involved in the provision of services in India, they have taken a significant share in that country’s market in the equipment business. The Indian mobile industry is second only to China’s in terms of subscribers. Both have large populations and rapidly modernising economies. China has 825 million subscribers, India 584 million. The number is increasing rapidly in both countries. In March 2010, India added 20 million new subscribers to the list. This rapid expansion has put pressure on mobile operators to add network capacity as quickly as possible.

Operators in India added significantly to the network in recent years investing about $34 billion in the process. While India is developing indigenous industry to supply the equipment needed, it cannot keep up with rapidly growing demand. It has had to rely on imports, a significant part of which – about 40 per cent –comes from China, which, as in so many other things, is able to supply much more cheaply. According to one estimate China is 20 per cent cheaper than such European providers as Siemens and Nokia. But a new wrinkle has begun to cut into this trade. I will return to this issue a little later.

A number of issues have begun to affect trade relations between the two Asian giants. New Delhi has liberally used the anti-dumping measures allowed under the WTO rules to restrict many imports form China. Some of the moves were made at the urging of Indian manufacturers.

According to a recent report in International Herald Tribune, “India recently clamped down on the number of visas allotted to foreign companies, a move regarded by some as being aimed at Chinese power companies that import labourers from home to build India plants.” This is a common Chinese practice.

For instance, when it constructed a new embassy building for itself in downtown Washington, China requested and received the permission to bring in Chinese workers into the United States. This was done so that the engineers from China working on the projects could communicate with their workers.

Most Chinese engineers are monolingual; they speak only Mandarin. But the Chinese maintain that they have used mostly Indian workforce for the projects in that country. Two Chinese companies – Huwaei and ZTE Corp., both among the largest players in the world – are active in building infrastructure in India. They employ 7,000 people in India, and 85 per cent of these employees are Indians.

The wrinkle that has begun to affect the flow of telecommunications equipment to India is the latter country’s security concerns. A report titled Shadows in the Cloud, released in April by the Citizens Lab at the University of Toronto said that computer hackers in China conducted an extensive spying operations in India. It began in 2009 and was able to obtain sensitive information including documents from Ministry of Defence. This has further deteriorated trade relations between the two countries.

This affair as well as the Chinese complaints about the excessive use of the WTO dumping clause by India have soured relations but probably not dealt a serious blow. What these incidents underscore is the absence of a dispute resolution mechanism to handle issues such as these. Pakistani manufacturers also complain of Chinese practices. Some of them suggest that producers in China have copied their products and sold them at extraordinarily cheap prices, ruining their industries. But they did not press the government to go to the WTO knowing that Islamabad would not resort to that provision because of the very close relations between the two countries.

Could a regional arrangement serve this purpose. China now has the status of an observer in SAARC but that organization remains weak, unable to deal with issues concerning its full members. In fact when the Indians agreed to the establishment of SAARC they insisted that bilateral issues would remain outside its purview.

Another approach worth exploring is for the large Asian neighbours – China, India and Pakistan – is to set up a multilateral commission that could perform a number of trade related functions, not just dispute resolution. Its main focus could be trade facilitation as well as improving the physical infrastructure – roads, railways, power grids, gas pipelines – that connect or should connect these countries. Perhaps Islamabad could take the lead in taking such an initiative.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"]Managing external flows[/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 11 May, 2010[/B]

FOR some time — perhaps for a very long time — Pakistan’s economy will remain dependent on external financial flows. The country cannot at this time achieve a sustainable rate of economic growth without obtaining a significant amount of money from abroad.

As several economists — the writer included — have pointed out, the country’s economy did well when money flowed from abroad. This happened during the periods of Presidents Ayub Khan, Ziaul Haq and Pervez Musharrraf. The rate of economic growth exceeded six per cent a year and serious dents were made in the levels of poverty.

For the last several years this relationship between large external capital flows and the rate of economic growth has broken down. Since 9/11 the country has received large amounts of money from abroad. Initially it had an impact on GDP. For three years the GDP increased at an average rate of seven per cent and the country seemed on its way to join other states in a rapidly growing Asia. Since then the economy has stalled. It is now clear that it will require large doses of foreign capital flows to recover. In the language of economics external capital flow for Pakistan is a necessary condition for growth but it is not enough. Many more things need to be done. Doing them will require some serious strategic thinking by Islamabad.

Continuing with the subject of foreign capital flows, it is worth pointing out that they come from several different sources each with different objectives. Balancing these is part of the strategy the government needs to develop. The flows are provided by friendly countries that have a variety of different interests they wish to pursue. They come from such development agencies as the World Bank Group and the Asian Development Bank primarily interested in promoting economic development and alleviating poverty.

The IMF on occasion becomes an important source of finance as it has for the last year and half for Pakistan. Its purpose is to provide quick money for helping countries experiencing severe economic stress. Pakistan, Iceland, Hungary and more recently Greece are some of the countries pursuing IMF programmes.

The private sector is often the source of funds. It may provide them as portfolio flows when investors pick up shares in the capital markets. The recent run-up in the Karachi Stock Exchange was helped by external portfolio flows. Capital may come as foreign direct investment when companies or individuals buy economic assets or build green-field plants.

The privatisation programme pursued vigorously by the Musharraf government brought in this kind of money. Countries such as Pakistan that have a large number of people living and working abroad normally receive large amounts of remittances. These are sent for a variety of purposes — help to family members, general charity, portfolio investment, general investment. In Pakistan’s case remittances are now the largest single source of foreign finance.

For a country as dependent on foreign money as Pakistan is today, mobilising money from abroad and channelling it into productive purposes become important areas for government involvement and public policy. There is a need to balance foreign with domestic interests. This is not always easy as demonstrated by the different objectives being pursued by the United States, the IMF and the development banks in Pakistan. I will begin by elaborating on the US strategy towards Pakistan and how Pakistan is reacting to it.

When countries provide money they do it generally in pursuit of their strategic interests. Among the four large bilateral donors to Pakistan the interests of China, Japan, Saudi Arabia and the United States differ. Reconciling these with domestic objectives can often be tricky. We are seeing this in the case of American help to Pakistan. With the Kerry-Lugar bill having become law, Washington has attempted to bring in line its policy with Islamabad’s interest: it is committed to helping the country over a long period of time with the level of support clearly indicated for a period of five years, possibly 10. This initiative took care of the long-standing complaint by Pakistan that Washington kept it on a short leash.

Washington also accepted Pakistan’s contention that fighting terrorism will mean more than the use of force. It will also need economic development of the enormously backward areas that contain a number of terrorists. The US had come to the same conclusion as it altered its own strategy by opting for what is called the ‘counter-insurgency’ strategy. It combines force with development. In return, the US wants Pakistan to aggressively pursue the terrorists operating on and from its soil.

The United States does not wish Islamabad to distinguish among various terrorist groups by using the criterion of the damage they are inflicting on Pakistan (Tehrik-i-Taliban) or concentrating their activities outside the country (the Haqqani network operating in Afghanistan out of sanctuaries in North Waziristan). Pakistan has been prepared to battle the former but not the latter. That it makes sense for Washington not to draw distinctions between terrorist groups is illustrated by the recent case of Faisal Shahzad, an American citizen of Pakistani origin who is alleged to have attempted to set off a bomb in New York’s Times Square.

Faisal is reported to have spent some time in Pakistan in 2009. He may have been motivated to attempt to bomb Times Square by one of the terrorist groups in Pakistan. Washington, therefore, cannot be expected to distinguish among different terrorist groups. No matter which way this case develops it will have profound implications for Pakistan-US relations. Islamabad needs to carefully manage this unhealthy development. Left unattended it will hurt the American interest in the economic development of Pakistan.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Asia and the Greek [/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 17 May, 2010[/B]

THERE are important lessons to be learned from the unfolding Greek tragedy. This is particularly the case for Asia that has for years looked at the process of economic integration in Europe as an interesting model to be studied for bringing about regional economic cooperation.
That said, a consensus has developed among Asian policy analysts that economic, political and social situations in Asia did not match those in Europe. Regional cooperation in Asia, therefore, had to be a much slower and deliberate process than the one pursued by Europe in the second half of the twentieth century.

The European Union evolved at a pace and in scope that could not have been possibly envisioned by its founding fathers half a century ago. The EU now has 27 countries as its members. They are of varying size and are at different levels of development.

Having given membership to so many countries, the Europeans have allowed some of the older participants in the enterprise to develop additional mechanisms for further integration. A group of 16 nations within the larger union has given up national currencies in favour of the euro, the common currency. Some of them have done away with the need for passports to cross their borders. Travelers need only one document to travel among these countries.Politics more often than economics was the reason for the race to integrate Europe. Initially it was the fear of the Soviet Union and the encroachment of Communism on the European mainland that prompted those in the western part of the continent to band together. There was considerable comfort in presenting the expansionary Soviet Union with a united front.

The EU expanded to the south and south west of the continent in order to prevent the spread of Communism. As the countries in the Iberian Peninsula and those along the Mediterranean cast off autocratic rule in favour of democratic structures, the European core felt it necessary to embrace them quickly. This would stop slippages from occurring. It was mostly for this reason that Spain, Portugal and Greece were admitted into the union. It is interesting that at this time all three are feeling extreme economic stress which was proving hard to manage because of the constraints imposed by membership in the European Union.

The EU’s expansion to the east also happened largely because of politics. As the Soviet Union collapsed and several countries in east Europe emerged from behind the Iron Curtain, the core group once again offered EU membership to secure their independence. Poland, Hungary, the Czech Republic, Slovenia and several other countries moved in as members. Poland’s inclusion was especially significant since under the Soviet Union the defense agreement among the countries in the east of the continent was known as the Warsaw pact, after the name of the country’s capital.

In hindsight the mistake the Europeans made was to marry economic objectives with political motives. While it was considered politically prudent to bring into the EU the countries on the fringes of Europe, they had to accept stringent economic conditions to obtain membership. But it turned out to be a process where policymakers did not pay much attention economic criteria. This is why the case of Athens unfolded like a classic Greek tragedy. No matter what roadblocks were erected Greece kept moving towards disaster.

The latest $1 trillion package of support is meant to prevent the worst from happening: the beginning of the unraveling of the union.

Europe’s current plight can be traced to 1981 when Greece, still recovering from the aftermath of military rule, was rushed into EU 14 years ahead of several more developed countries . Greece beat the much richer Austria, Finland and Sweden to the European stage. That was not the only lapse In January 1999, 11 countries locked their currencies – the first stage in the creation of euro, the common currency – after agreeing to a tough set of conditions. These included budget deficits that must remain below three per cent of the country’s gross domestic product; national debt must not exceed 60 per cent of GDP; and the annual rate of inflation must remain below three per cent. Countries such as Greece could not – and did not – make the grade but were still admitted.

But Athens persisted, even resorting to the cooking of its accounts. In 2002, Greece was among those that gave up their currencies to adopt the euro. When the new currency notes were being printed Yannos Papantoniou, the then Greek finance minister, implored his counterparts that the euro notes and coins that circulated in his country should also carry the wording in Greek alphabet.

According to Jurgen von Hagen, professor of economics at the University of Bonn, when Greece was admitted into the euro club, “there were clear indications that Athens was forging the data, especially data on deficits, to make their public finance more benign than it really was. But European governments did not want to pay attention. For political reasons they wanted Greece in.” It paid Greece to be in but only for a while. Membership in the Union and a currency it shared with such economic power houses as France and Germany meant that the country could borrow cheaply. It did that copiously particularly to finance the 2004 Olympic Games in Athens, the city that had first held such a competition. Now the bills have come due and the country has had to go hat in hand to Germany, France and the IMF for a massive bailout.

This story has obvious lessons for Asia which is also engaged in a complicated exercise to integrate its many economies into regional associations. Two lessons should be learned from the European experience. Regional integration should be guided by economic considerations rather than by politics. A neat arrangement that encompasses a diverse group of countries is not necessarily preferable to the one that evolves, perhaps untidily over time and on the basis of experience.

The Asians, ever pragmatic, have allowed regional associations to grow and evolve not according to some grand design but to reflect the needs of the time. Attached to the ASEAN now are number of arrangements that have allowed several countries to bind themselves with the core depending on their varied interests. This is the way to go.

This approach has worked well for East Asia. In South Asia, however, attempts at regional integration have largely stalled for political reasons. The two largest economies in the South Asia Association for Regional Cooperation, the SAARC, have so many political problems between them that they have found it difficult to push forward such efforts as the South Asia Free Trade Area, the SAFTA.

As was demonstrated recently at Thimpu, Bhutan there was so much interest in the meeting between the prime ministers of India and Pakistan on the sidelines of the SAARC summit that little attention was paid to regional matters.

In Europe politics pushed regionalism faster than it should have gone; in South Asia politics is having the opposite effect. But the fact remains that South Asia needs serious regional cooperation as much as Europe did in the immediate post Second World War period While South Asia should move in that direction in a measured way – a lesson to be learned from the European experience – it must begin the journey with serious intent.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]India & South Asia’s future[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][CENTER]India should work towards bringing stability to its neighbourhood. It should not feel tempted to go it alone since it will be continuously distracted by instability and uncertainty.[/CENTER][/B]

[B]By Shahid Javed Burki
Tuesday, 18 May, 2010[/B]

INDIA’S GDP increased at al most nine per cent a year before slowing down when the world went into the recession in 2008 09. It has picked up again with Finance Minister Pranab Mukh erjee promising in his 2010-11 budget speech an annual 10 per cent increase in GDP to be ach ieved in a couple of years.

While India is rising, it will find it dif ficult to achieve the coveted status of an economic superpower. This is for at least two reasons. One it has not found a way for the relative prosperity achieved by a quarter of the population to reach the remaining three-fourths. As Joseph Stiglitz writes in his most recent book on globalisation India is indeed shining “on the lives of some 250 million people [but] for the other 800 million people of India, the economy has not shone brightly at all.” The other reason why India has been held back from achieving its ambition is that it is an island of relative stability in a highly restive part of the world. There is an on-going conflict in Pakistan involving the rise of Islamic extremists who are challenging the writ of the state. Thousands of people have perished in the conflict to which there is no end in sight. This conflict has been seen by some as posing an existential threat to the country.

The militants and terrorists operating from within Pakistan are not only endangering the survival of the Pakistani state. They have also extended their operations beyond the country’s borders as evidenced by the Mumbai attacks in November 2008. More recently, an American citizen of Pakistani descent attempted to set off a car bomb in New York City’s Times Square.

The future of Afghanistan, not strictly an Indian neighbour, remains highly uncertain especially given the fact that US wants to begin withdrawing its troops from that country beginning next year. Nepal to India’s immediate north, re mains unsettled and in considerable turmoil. The powerful Maoists who earlier showed some willingness to work with the established groups to stabilise the country called a strike some weeks ago, paralysing the capital Kathmandu. As Manjushree Thapa, a Nepalese, wrote in an article published in May 2010, “we Nepalese are still baffled about how to be part of the modern world ... For this we are still … waiting.” Bangladesh to the east is still struggling to stand on its feet although it has made some progress since the return of democratic rule. It now has the second highest rate of GDP growth in the South Asian mainland after India.

Then there is Sri Lanka to the south, not strictly a part of the South Asian mainland but the narrow body of water that separates it from India is not wide enough for it not to cast a shadow on its neighbour.

Although the military was able to put down the long-enduring Tamil insurgency, discontent among the members of this large minority remains. That the Tamils are a large community in India complicates matters. What complicates issues further is the country’s drift towards authoritarian rule.

It is only with the little kingdom of Bhutan where the monarch has willingly surrendered most of his royal powers that India has a stable country on its borders.

Even India has had to deal with armed rebels in its midst, whose ranks are being swollen by the discontent occasioned by growing inequality. Known as the Naxalite-Maoists, this challenge to the Indian state was first thrown in the eastern village of Naxalbari. The areas in which insurgents draw their support are sometimes referred to as the ‘red corridor’. In 2006 Prime Minister Manmohan Singh called the group’s activities “the single biggest challenge ever faced by our country”. Two years later the prime minister said the country was “losing the battle against Maoist rebels.” India has enough military strength to first contain and then overcome the challenges it faces at home. Its leadership recognises that a high rate of economic growth, which the country has demonstrated the ability to achieve, will not trickle down fast enough to handle growing discontent inside its borders and among its own people.

The government is committed to helping the lagging rural sector. It was worried enough about creating new jobs for new entrants to the work force to launch an employment guarantee scheme for rural areas. It is the external challenges emanating from its immediate neigh bourhood that need to receive the attention of policymakers in New Delhi. India must lead the regional integration effort rather than be the perpetual laggard.

What then are the options available to India, by far the largest country in South Asia by virtue of the size of its population and that of its economy, to achieve the status of an economic superpower? This question has several answers. The most obvious one is to working towards bringing stability to its neighbourhood.

It should not be tempted to go it alone since it will be continuously distracted by instability and uncertainty all around its borders. But to deal with its neighbours, India will need to cast off part of its old approach and work towards a new strategy aimed at producing a working economic entity in South Asia to which it and its many neighbours are fully committed.

A move in that direction is not taking place. The most important initiative in this respect is the South Asian Association for Regional Cooperation, Saarc, created a quarter of a century ago. As shown by the Bhutan summit of April 2010, there was much greater attention given to the meeting between the prime ministers of India and Pakistan on the sidelines of the summit than to the work of the summit itself.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Shaping South Asia’s future[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 24 May, 2010[/B]

In spite of the effort made over the last quarter century to bring about more meaningful economic integration of the South Asian region, not much has been achieved. Regional trade as a proportion of the total has increased a little but compared to other regions, it remains almost insignificant.

How much is the area losing out by not turning sufficient amount of political attention to integration and cooperation? One way of answering this question is to use trade as the driving force for accelerating economic development.

Using trade as the basis and historical GDP-trade elasticities for making projections, it is possible to develop some scenarios for the future. We do this purely for illustrative purposes.

The three scenarios presented here are based on assumptions about the extent of integration as well as the degree of reorientation of trade with a significantly more of it going to Asia in general and South Asia in particular.

According to the first scenario in Table 1, the countries in the region continue to focus the direction of international trade and its content on distant trading partners. We call this the base case.

For India, the United States and the European Union remain the most important markets for its exports and the most important source of its imports. The same is true for Pakistan. Even though China-India trade is likely to grow at a faster rate than overall trade, increasing Beijing’s share in New Delhi’s international trade, India does not become a partner in the China centered system of production that is taking shape.

According to this scenario, the growth of India’s GDP is sustained at the rate of seven per cent a year in the 18 year period between 2007 and 2025. This is well below the 10 per cent growth target Finance Minister Pranab Mukherjee set for the country in his budget for the year 2010-11. The size of the Indian GDP increases more than three-fold and income per capita grows 2.75 times. India’s share in the combined GDP of the region increases from 82 to 86 per cent.

Bangladesh will be the second most rapidly expanding economy according to this scenario with the rate of increase in GDP averaging six per cent a year. Nepal does the least well with the rate of growth at 4.8 per cent. Pakistan’s performance lies somewhere in between that of India and Nepal. Growing at 5.5 per cent a year, the size of its GDP increases 2.6 times but its share in South Asian total output declines from 10 per cent in 2007 to only eight per cent in 2025.

The second scenario is based on the assumption that the South Asian countries take greater cognizance of the importance of international trade as contributor to growth and also of the move in the centre of gravity of the global economy to the Pacific from the Atlantic.

What this means is that the countries of the area pay greater attention to the changing structure of the global production system. This will be largely centered on China. New Delhi’s policymakers, taking note of this, are already deeply engaged in building better economic relations with the ASEAN group of countries. They are also participating in the Asian Economic Summit, an arrangement that includes ten countries of the ASEAN region as well as Australia, China, Japan New Zealand and South Korea . This change in strategy adds to the rate of growth of all South Asian countries. India’s GDP is 12 per cent higher compared to the base case scenario but its share in the regional GDP remains the same at about 86 per cent. (See Table 2.)

The third case builds on the second by assuming that South Asia manages to develop stronger economic contacts among the countries in the area. Compared to the status quo situation in the first scenario, the combined GDP of the region is considerably larger as is income per head of the population– both by as much as 40 per cent. The incidence of poverty declines significantly and better services are provided to the citizenry. South Asia is also better integrated with the rest of Asia.

In terms of rates of growth, the largest gainer is Pakistan followed by India. Pakistan’s GDP growth according to the third scenario is 2.4 percentage points higher compared to the first while India’s is two percentage points better. In the case of Pakistan income per capita of the population in the third scenario is 52 per cent higher while that of India is 40 per cent greater.

The impact on poverty and quality of life will be pronounced if the third scenario is played out. This is for the reason that economic structures will be profoundly different in this case, particularly in the countries on India’s borders. Pakistan, for instance, will be able to develop agriculture to take advantage of the huge Indian market. This would have happened had the countries not severed their trade relations soon after gaining independence from the British rule. Then close to two-thirds of Pakistan’s imports came from India and about the same proportion of its exports went to that country. These proportions declined to about five per cent when the two countries declared a trade war in 1949 on the issue of the rate of exchange between their currencies. This is where the proportions have remained in spite of the launch of the South Asia Free Trade Area initiative in January 2004.

With the rebuilding of economic and trade contacts other sectors could also get aligned. Pakistan could become an important supplier of auto parts to the rapidly developing Indian automobile industry while India would become the main provider of iron ore to the steel industry in Pakistan. Bangladesh could get better integrated in the much larger textile sectors of the two larger economies, India and Pakistan.

However, to realise the third scenario there will have to be exercise of considerable amount of political goodwill which has been in short supply now for many decades.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Discontent in India[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 25 May, 2010[/B]


DISCONTENT in India has been brewing for a long time. It has now come to the surface with the rise of the Maoist rebellion in several states of central and eastern India. The rebels have inflicted very heavy damage on the security forces that are attempting to bring the insurgency under control.

A large number of people have been killed since April when the Maoists launched one of their more brazen attacks, killing 76 security personnel. They struck again recently blowing up a bus that was carrying 50 people. Of these 18 were special police officers belonging to a separate force to fight domestic terrorism. The Maoists triggered an improvised explosive device near Dantewada in Chhattisgarh India.

These attacks indicate a clear escalation in the activities of the Maoists, a movement that started decades ago among the hill tribes in the eastern state of Assam. According to government sources, there were 2,250 attacks in 2009. In the first four and half months of this year, the rebels have launched 810 attacks. In 2009, 590 people were killed by the insurgents. Their activities in 2010 have already claimed some 200 lives.

As political scientist Samuel P. Huntington wrote more than four decades ago it is almost inevitable that a society and an economy that grows fast will leave behind many segments of the population. This will manifest itself in open discontent if the country experiencing change does not have strong political and economic institutions to absorb discontent and provide relief to those who suffer from what he called “relative deprivation”.

Much of the evidence Huntington used for his seminal work came from Pakistan and some Latin American countries. When he was completing his work, the Ayub Khan era was coming to an end in Pakistan and there was a widespread feeling that large sections of the population had not benefited from the admittedly large increase in national output. This feeling was very strong in East Pakistan and also present in the western wing of the country.

Economist Albert O. Hirschman, writing about the same time as Huntington, went a step further and identified what he thought were the options available to those who were not happy with their situation compared to the major beneficiaries of social and economic change. The title of his influential work, Exit, Voice and Loyalty, indicates the options he had in mind.

In a well-developed political system, those not satisfied can hope to be heard by raising their voice; if those who wield power act to redress the felt grievances, they can hope to win the loyalty of the affected population. If not, the adversely affected are likely to exit, moving into the areas that are hard to reach for the forces of the government. This is what the Maoists have done.

That the situation described by Huntington and Hirschman could lead to violence and ultimately regime change was understandable in a country such as Pakistan in the late 1960s when the political system of the times did not provide adequate space to the disaffected. ‘Exit’ was the only choice available and was exercised by the people not only against Ayub Khan but also Zulfikar Ali Bhutto a few years later.

India is different. For more than half a century it has had a political system that successfully accommodated many diverse people. Why is it then that the groups such as the Maoists have taken up arms against the Indian state? And why is the Indian state finding it so difficult to control the situation?

The answer to the first question is that the mode of development pursued in recent years by New Delhi has led to the creation of much visible wealth for one class of people while there has been little material change for the masses.

Income inequality has increased to the point that the high rates of growth of the last two decades have made little change to the incidence of poverty. The poor in the large Indian countryside have not seen much improvement in the quality of their lives.

The pursuit of growth has led to the exploitation of the areas that are rich in mineral wealth. However, adequate compensation has not been given to the people who have lived there for centuries. It is the mining of coal in some of the forested areas that has led to the rise of the Maoist movement.

In a statement issued by the Communist Party of India (Maoist), that has provided the political umbrella under which most of the dissident groups are operating, the blame was laid at the government’s door. “As long as the government refuses to see the socio-political roots of Naxalism and continue to treat it as a problem … Dantewada-type attacks will continue to take place [with] greater frequency and intensity. An all-out war has already been declared. Maoist counter-violence will take on new and deadly forms which these apologists of state terror cannot even imagine.”

The Indian state’s slow and somewhat clumsy response to the situation is somewhat reminiscent of the one initially adopted by the government in Islamabad in dealing with the Taliban movement. It was only after a great deal of damage had been done to the Pakistani economy and to the country’s reputation that the authorities developed a position that has begun to yield results.

In India there is now an intense debate in the media and among the political circles about the best approach that needs to be followed. P. Chidambaram, the home minister, is in favour of using as much force as possible and equipping the security forces fighting the rebels with helicopter gunships. Several ministers in the Manmohan Singh cabinet are in favour of using a softer touch — negotiations and development to win the Maoists to give up their fight. Which way this dispute is settled will have a tremendous bearing on India’s future.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Remaking of the corporate world[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 31 May, 2010[/B]

BY now the suggestion that the global economy is being reshaped by the process economists call “catching up” is generally accepted. There is no doubt that Asia is rising and within Asia, China has replaced Japan as the dominant economy.

The Japanese, when they dominated Asia, were really oriented towards the West; they had few contacts with the Asians, including those in their immediate neighbourhood. Initially China followed the same model, growing by exporting large amounts of cheap manufactured products to the West. But that approach has changed in the last few years. There are three reasons for this. Two of these are already in place; the third has only very recently begun to acquire salience.

The first reason is the remaking of the global production system that has reduced the emphasis on producing one product entirely by one process within firms. Instead, products are now being made by importing parts and components from many different places. The production process has been scattered to the four corners of the world; it has become globalised. The process will continue for many reasons, among them demographic changes in the developed world. Today’s industrial countries are simply running out of people to staff and manage businesses.

The second reason is the way some of the large emerging economies have dealt with the Recession of 2008-09, spending large amounts of “stimulus money” in reshaping their economies rather than simply creating jobs by pumping money into what President Barack Obama called “shovel ready” projects.

The Chinese, for instance, used the money to build infrastructure that will aid their economic transformation. A good part of this money went into improving China’s links with the countries in the neighbourhood. Among the countries China is developing links with are Vietnam, Laos, Thailand, Myanmar and Pakistan. This means that China is paying much greater attention to Asia than was done by Japan which was the second largest economy in the world before being replaced by China.

The third contributing factor to global change is the growth and geographic expansion of firms in the emerging world. Let us begin with some data before going on to discuss the impact of this development on the global economy. The “emerging firms”, to coin a phrase, have become more important in the corporate world over the last ten years.

In 2000, only 26 companies from the emerging world made it to the list of the Financial Times 500 companies. Their total capitalisation was estimated at $700 billion out of $21.3 trillion. In other words, only 5.2 per cent of the firms from the emerging world then could be classified as big and they had 3.2 per cent of the capital worth of the world’s 500 largest companies. The average size of the large emerging firm was about $27 billion as against $43 billion for the firms in the old industrial countries.

The picture since then has changed quite remarkably. There are now 199, or 23.8 per cent of the total, emerging firms listed by the Financial Times among the world’s largest. Their size has increased to $45 billion compared to $48 billion for the firms in the industrial world. In 2000, the average size of the large firms in the emerging world was 63 per cent of those in the industrial countries. Now, ten years later, they are practically of the same size.

The firms in the emerging world increased their presence in the global corporate world – and their size as well – through acquisitions and not organic growth. Again some numbers will help us to understand the trends. Three years ago, before the Great Recession pulled down the global economy, $211 billion of money spent on mergers and acquisitions flowed from the developed to the developing world. But the developing countries’ firms were also buying assets in the developed world. For every dollar that developed countries’ firms spent in M&A activity in the developing world, developing countries spent 87 cents.

In just two years, the ratios changed dramatically. In 2009, the cash-strapped corporations in the industrial world spent only $74 billion acquiring businesses in the developing world while the developing countries put in $105 billion for the same purpose.

This time for every dollar spent by the developed world corporations in the developing world, the developing world companies spent $1.42. As these numbers suggest, developed country firms have not given up expanding into the developing world. In fact some of the newer firms in the West have been aggressive in creating a presence in emerging markets. Microsoft has developed a large development and research centre close to Beijing while Cisco has set up its “eastern headquarter” in Bangalore.

Size begets size. It was only the very large developing countries’ firms that were engaged in acquisitions in developed countries. Some of these transactions hit newspaper headlines and rocked the developed world. When India’s Tata acquired Corus for over $110 billion, it was recalled by British newspapers that in the 19th century the grand father of the current head of the company was turned back contemptuously by the British when he sought to bid for the supply of railway track for the Indian railways. Indians, he was told, should concentrate on tilling the soil rather than venture into the complicated business of making steel products.

Those kinds of prejudices and biases are gone but other types of obstacles remain. On several occasions security concerns have been cited – in particular by the Americans – to prevent developing country firms from picking up assets. One example of this is the attempt by World Port, a Dubai-based company, to buy P&O, a firm that owned and managed a number of ports in the United States. The reason for this may have been that the acquiring firm was based in an Arab state and ports are considered to be sensitive assets. However, the Americans have been equally reluctant to let in the Chinese firms into some of the areas they consider sensitive. Washington objected to a bid by the Chinese telecom giant Huawei to buy 3Com, a US network technology company.

There is a belief that the Chinese and Indian firms that are expanding abroad are doing so to ensure a steady supply of raw material and sources of energy for their countries. That is only part of the reason. These companies are also interested in acquisitions for a number of other reasons: to get closer to the markets for some of their products and services, acquire new technologies and skills, diversify geographically. While the bulk of the acquisition activity has involved firms in large Asian countries, the Latin Americans have also begun to look outside their borders. The Brazilians in particular have become active.

For obvious reasons Pakistan has been almost totally absent from this area. It has not developed firms of the size that they can think of going abroad to look for expanding markets. Financial sector firms, in particular commercial banks, are the only corporate entities that have the wherewithal to venture outside the country’s borders. But they have decided to concentrate on developing the domestic market. The only example of some acquisition activity is Netsol, an IT company based in Lahore, that has acquired small companies in the UK and the United States to develop new markets for its products. Other IT firms may follow but firms from the older parts of the economy will stay domesticated unless they develop the size.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Terrorism & the economy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 01 Jun, 2010[/B]


THE latest incident of attempted terrorism in the United States which has links with Pakistan has administered another blow to our economy. The reference here of course is to the attempt by Faisal Shahzad, a 30-year-old American citizen of Pakistani origin, who attempted to detonate a bomb in Manhattan’s Times Square.

The bomb did not go off, which is a great relief not only for the United States but also Pakistan. Had it taken its intended toll, the repercussions for Pakistan would have been grim. It would have set back the prospects for an economic recovery by years. Newspapers quoted a senior official of the Clinton administration saying the “the Times Square attempt has reminded Americans that most of the threats to the US homeland come from the Pakistan-Afghanistan border region.” Fareed Zakaria in a cover story for Newsweek described Pakistan as a terrorist supermarket.

Secretary of State Hillary Clinton told 60 Minutes, a widely watched TV news programme, that there will be “grim consequences” if damage was done by an attack that had links with Pakistan. There was pressure on President Barack Obama to act before it was too late. There could be a reduction in the quantum of aid flows to the county if a terrorist attack is seen to be connected to Pakistan.

As if to underscore the Pakistani involvement in international terrorism, an Indian court sentenced to death 22-year-old Mohammad Ajmal Kasab, the lone survivor of the deadly assault on Mumbai on Nov 27, 2008. The assault was launched by a group trained by a terrorist organisation in Pakistan. Kasab was earlier found guilty on most of the 86 charges brought against him, including murder and waging war against India. The terrorist had given a statement to the authorities saying he was trained by members of the Lashkar-i-Taiba, a Pakistani group designated as a terrorist organisation by both the United States and the United Nations.

The third reminder of terrorism’s links with Pakistan came when another US resident of Pakistani origin, David Coleman Headley, was taken into custody in Chicago for planning the Mumbai attack, prompting India, according to one analyst, “to repeat that extremists living in the territory of its neighbour are exporting militancy”. This is the link that Ahmed Rashid makes in a recent article contributed to the pages of The Washington Post where he says that North Waziristan, one of the seven tribal agencies located in the area that borders Afghanistan, has become “the hub of so many terrorist groups and so much terrorist plotting and planning that neither the CIA nor the ISI seems to have much clue as to what is going on there…. But Pakistan’s counter-terrorism strategy, which has been extensively praised by American generals, is now coming apart at the seams — all because of North Waziristan.”

What is the connection between the perception that Pakistan has become the centre of international terrorism and the country’s economic recovery? The most important link is via Pakistan’s dependence on external capital flows for its economic survival. Of the many types of flows Pakistan depends on, at least three would be seriously affected by the growing apprehension that most acts of terrorism — those that have been carried out and those that have been attempted but were thwarted — originate in Pakistan. The suggested links to Pakistan will not help with foreign private flows and continued assistance by the US government. Even remittances sent by Pakistanis living and working in the US could be affected as those sending money become extremely cautious about the possibility of being questioned by the authorities in America. What should Islamabad do to address this issue and to give the signal that it takes very seriously the use of its territory for the launch of any form of terrorist activity on foreign soil?The first thing that needs to be done is to develop a comprehensive strategy aimed at addressing the problem posed by the county’s real and perceived links with acts of terrorism. Statements by senior policymakers — and there have been many of those in recent months — indicating Pakistan’s resolve to deal with the threat of terrorism don’t constitute a strategy. A strategy has to include a number of elements: a precise definition of what constitutes a terrorist attack and what are the punishments meted out if these acts are committed; how the legal and judicial system will work to ensure that those who violate the law of the land will be expeditiously dealt with; and educating the youth about their responsibility towards the state and the citizenry.

Such a strategy should be developed by a group that has a multidisciplinary background: a group that can view the phenomenon of terrorism from many different angles — economic, political, social, religious. It should have the full backing of the political classes who should be called upon to endorse the strategy, once formulated, fully and without reservations. While it is true that Pakistan has anti-terrorism laws on the books and courts to enforce them, they have done little to implement them. Terrorism has not been brought under control.

The other important move by the state is to make it clear that breaking the law of the land will not be tolerated, no matter who commits the crime. Organisations must not be allowed to operate training camps for militant activities, to collect funds for their operations, to run schools that don’t have proper accreditation and to use mosques to propagate outlandish beliefs.

Politicians normally take the path of least resistance and some of these measures may be hard to adopt and implement. But the alternative is the country’s destabilisation and further marginalisation in the global community. Pakistan is very isolated these days; further isolation would do it enormous damage.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Budget-making in turbulent times[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 07 june, 2010[/B]

PAKISTAN’s economic history has been exceptionally turbulent since it became independent more than six decades ago. There have been many ups and downs – more downs than ups – during this time. Many of them were caused by natural events, some by happenings outside the country’s borders, but most by the decisions taken by those who were responsible for the making of public economic policy.
This is probably the first time that all these contributing factors have come together to produce a perfect storm.

To help the country, navigate through this period of exceptional turbulence will need political will, a good understanding of the nature of the of the problems that need urgent solutions, an appreciation of the policies that will work and those that may do more harm than good, and a full awareness about the consequences on various segments of the population of the changes in public policy.

It is in this situation that Dr Abdul Hafiz Sheikh was called upon to become the economy’s steward. Within a few weeks of taking office he was required to prepare and present the federal budget for 2010-11.My initial judgment is that given the difficult circumstances in which he had to craft the budgetary proposals he has done reasonably well. This assessment is based on a quick reading of three documents: the budget speech, the Pakistan Economic Survey, 2009-10, and ministry of finance’s Medium-Term Budgetary Framework.

How well has the government done in putting together the budget proposals will be discussed in the national legislature in the coming days? However, before answering this question, I will discuss some of the points Dr Sheikh raised at a function organised by the Institute of Public Policy on June 1.

He said that the budget, as a result of a tradition that originated in Britain, has acquired the prominence in parliamentary systems that is somewhat misplaced in modern times. In modern economics budget is one of the many instruments of public policy used by the government to manage and guide the economy. By focusing so much attention on just one instrument of public policy, the people (and that includes the media) are taking the government off the hook during non-budget periods when changes in policy also have great significance. That is the correct position to take.

In fact, in a number of countries major economic policies are being made in the context of medium-term frameworks usually defined as three years. This way the government removes the element of surprise from such instruments of public policy as annual budgets.

People – both consumers and investors – know what to expect from government’s policies over the medium term. Annual budgets then are just a list of marginal changes the government wishes to introduce at that time given the way the economic environment may have been reshaped by some unanticipated events.

Dr Sheikh said that in developing the government’s fiscal stance he was essentially following three basic principles: first economic recovery that has begun to take shape must be protected; two, the government must remain fiscally austere and prudent; and, third, the poor must be provided the financial means as well as institutional support so that the burden of adjustment does not fall disproportionately on their shoulders. These three principles of policymaking are not well reflected in his budget, a point to which I will return in a moment.

That the recovery from the deep economic slump of the last couple of years has begun to manifest itself is the main theme of the Pakistan Economic Survey, 2009-10. The government has lowered the rate of growth estimated for 2008-09 from two to 1.2 per cent. This has the effect of reducing the base, allowing the authorities estimate a higher growth rate for the year in progress. Accordingly, for 2009-10 the government is now estimating a growth rate of 4.1 per cent in the gross domestic product. In the budget the government’s growth target is 4.5 per cent.

For the coming year, the government was faced with one big challenge: how to raise and manage the resources needed to maintain the pace of recovery which was noticeable at this time. The government had to ensure that the fiscal side of the equation was not squeezed to the point at which even the modest recovery that was in place would not be sustained.

The IMF and the World Bank have pressed for lower fiscal deficits. These, they have said, can be achieved by reducing the amount of subsidies that were allowed to various types of consumers. The institutions targeted energy subsidies for special attention. A 40 per cent increase in power tariffs was needed to bring the cost of producing energy in line with the revenue generated from its sale. Such a major change would have unhealthy conse quences; it would, to begin with, reduce the competitiveness of the economy and also hurt the lower middle classes that are already burdened by high and increasing inflation.

The other emphasis was also on resource generation by introducing a new tax instrument, the value added tax. To be successful in both areas, government needed to prepare the public more than it did.

This is one reason why the budget presented late on June 5 has not taken a clear position on resource generation, leaving the use of the VAT more fully perhaps to a later date.VAT is a powerful tax instrument. It has many positive features. It leads to better documentation of the economy, something needed to done urgently.

Given what the new finance minister had said while preparing the budget about the principles that will guide him only one has been fully observed. This pertains to the provision of more income support for the poor by the greater use of instruments such as Benazir Income Support Fund. The impression among people who have looked at the programme is that it is working reasonably well. Institutions such as the World Bank have developed mechanisms that produce better targeted delivery of resources aimed at augmenting the incomes of the poor.

However, where the budget falls short is in other two areas of public policy: how the recovery that is taking place will be sustained and how will the resources needed for it will be mobilised. There is no clear indication as to how the tax structure will be changed to broaden the tax base and increase the tax to GDP ratio. These questions have been asked and analysed in numerous reports produced by experts.

At a pre-budget panel TV discussion, a former industries minister Jehangir Tareen said he was the only big farmer who paid tax on income he gets from agricultural activities. If this claim is correct, it is a sorry reflection of the tax structure currently in place.

Also, I would have liked to see greater focus on reducing government’s non-development expenditure in which there is a great deal of waste and a fuller discussion of the drivers of growth that will produce sustainable growth. The promised fiscal deficit of four per cent can only be realised by a judicious mix of additional tax resources and cuts in expenditure.

Going back to the point Dr Sheikh made about the need to make public policy on a continuous basis, I can only hope that what he couldn’t do in the budget policy he announced on June 5, he will take up in the next few months.

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

[B]By Shahid Javed Burki
Tuesday, 08 Jun, 2010[/B]

IT is the obligation of the US president to inform Congress of the strategy his administration is pursuing in international affairs. This is to be done every year but presidents also take this opportunity every few years to present a more comprehensive review.

The last time this was done was in 2002, a few months after the terrorist attack on the United States. As was to be expected, the Bush strategic statement was heavily influenced by 9/11.

Eight years later, President Barack Obama has unveiled his strategy. It couldn’t have been more different from the one followed by his predecessor.

President Bush declared that the United States would be prepared to act unilaterally if it felt that its strategic interests were being hurt by unfriendly actors on the global scene. These could be countries or stateless elements bent upon doing the US harm. The latter was the case with Al Qaeda that had declared its intention to attack American interests whenever and wherever it found the opportunity. Washington under Bush also sent out the signal that it would take action without waiting for a hostile event to occur. It would act preemptively.

That some of the declared intentions violated international law did not seem to bother the Bush administration. In fact, the 2002 strategy statement laid the ground for the attack on Iraq that soon followed. The case for the attack was the basis of the preemptive action. As then Bush’s national security adviser — later secretary of state — Condoleezza Rice famously indicated that to act when the “mushroom cloud” had appeared would be to wait too long. Washington had said that it had credible information that Baghdad was working on weapons of mass destruction, and therefore it was its right to act before the mushroom clouds appeared.

The Bush strategy statement went far in another direction. It said that the US position as the world’s premier power would not be allowed to be challenged. Washington would be prepared to act, peremptorily, whenever it thought that a situation was arising which might result in a serious challenge to its position in world affairs.

President Obama’s thinking is totally different from the one encapsulated in the 2002 statement of the man he succeeded as president. There is no swagger in the way the US presents its position. According to the new statement, officially called the National Security Strategy (NSS) report, the United States must first get its economic house in order if it wants to reinvigorate its global leadership.

In the preface to the 2010 statement President Obama assures the American people as well as those in the world who are comfortable with the idea of America leading the way that his country has been “hardened by wars” and “disciplined by a devastating economic crisis”. These have already taken a heavy toll in terms of lives lost and led to a rise in the rate of unemployment and a decline in real income. The statement emphasises that the nation’s huge national debt, estimated at $13tr, is becoming a major threat to US security and leadership.

The focus on the state of the domestic economy is meant to serve two purposes. It is a call to action by a leader who has been left battle-scarred by his fight to win comprehensive health reform intended to provide cover for tens of millions of uninsured people. His effort to reform the financial system battered by the recession of 2008-09 are also meeting with resistance from the Republican party that is determined to oppose him on every initiative he takes.

The other reason for focus on economic issues in a statement on international affairs is to convince the world that the United States has an administration in place that understands the economic problems the country faces and also has the solutions to address them. The tragedy in Greece is a reminder that governments relying on fiscal deficits to provide for people’s basic needs are standing on shaky ground.

After abandoning President Bush’s unilateralism, the Obama administration declares that it will expand partnership with rising powers like China, India and Russia. It calls these countries the “21st-century centres of influence”. But the US will also look beyond these countries and develop strong relationships with the “increasingly influential nations such as Brazil, South Africa and Indonesia”.

While focusing a great deal of attention and space in the statement on the emerging powers, it reassures Europe that its traditional ties with the continent will remain the cornerstone of US engagement with the world. A couple of weeks before the statement was issued President Obama had involved himself deeply in finding a solution for the Greek financial problem. It was at his urging that German Chancellor Angela Merkel had agreed to provide large amounts of financial support to the beleaguered Mediterranean nation.

The most important parts of the statement are the treatment of the threat posed by radical extremism and the opportunities created by the rise of China. The NSS makes it clear that it will not define America’s engagement with the world from the perspective of extremism and terrorism. This is another significant departure from the Bush strategy.

On China, the statement seems to pull back somewhat from the position President Obama had taken during his first official visit to East Asia in November 2009. Then he was working towards an arrangement in which Washington and Beijing would work together to guide the world towards a better economic future. That thought remains but there is now greater focus on China’s military rise. “We will monitor China’s military modernisation programme and prepare accordingly to ensure that US interest and those of its allies, regionally and globally, are not negatively affected.” This is the only place where there is some continuity with regard to the Bush strategy.

How will the new strategy affect Pakistan and its interests? That is the subject for the article in this space next week.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Wooing sovereign funds for capital[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 14 june, 2010[/B]

FINANCIAL innovation was the most important feature of the development of the global economy in the 1990s. It was a part of the process that came to be called “globalisation.” By now the story is well known about the use of a technique called “securitisation” and the havoc it wrought on the global financial system. That havoc resulted in the Great Recession of 2008-09.
Banks and investment houses developed new lines of products which they used to package loans they had made into investment products that were then sold to the institutions that were prepared to hold long-term paper. Some components of the packaged products were “toxic assets” – mostly loans made to households for the purchase of residences. There was no possibility that these loans would be either serviced or paid back. When that fact came to be widely known, confidence in the banking system quickly collapsed. Bank systems cannot work without confidence. Consequently the flow of capital virtually ceased for a few months. The rest, as they, say is history.

What is not so well known is the birth and rapid development of an other instrument of finance called the “sovereign fund.” As the name suggests these entities are run by governments. And since they manage vast amounts of money for investment they are gaining enormous clout in both developed countries as well as among emerging markets that are desperately short of foreign finance. The latter group of countries includes Pakistan. A large number of countries are wooing the funds to obtain capital.This is all the more reason why their operations should be fully understood.

Sovereign funds are located in the countries that have large foreign reserve holdings. Most of these were produced by trade surpluses. They are, therefore, mostly to be found in the regions that have enjoyed trade expansion, mostly exports of manufactured goods over long periods of time. This includes mostly countries in East Asia. Or they are in the countries that are large exporters of oil and other minerals. These are not only in the Middle East but also in North Europe. Norway, for instance, was the first country to launch a sovereign fund with the objective of making investments that would yield returns for the country’s future generations.

Now with the demand for commodities and metals increasing particularly by such rapidly expanding economies as India and China, the countries engaged in their production and extraction are also setting up sovereign funds of their own. Australia is an example of the some of the new entrants into this financial game.

Countries that have accumulated large foreign exchange reserves like to place them mostly in safe investments. The United States Treasuries are considered to be the safest assets available even though the rate of return provided by them is low – much lower than available from other types of investments. The conventional wisdom that guided this approach to investment was that since reserves are held to tide over unforeseen crisis they must be kept in the assets that were highly liquid. This meant gold and government paper issued by developed countries. The United States government bonds were highly valued for this reason.

There is no reliable estimate of the amount of money the funds have accumulated in the form of liquid assets as well as investments. The estimates range between $2-3 trillion with Abu Dhabi’s Investment Authority being the richest. Most, but no all, sovereign funds are in the Middle East but countries such as Australia and China are also ex panding their activities in this area.

For capital deficit countries in the Western world – a category that includes the United States and most European nations – sovereign funds helped close the gap between foreign earnings and foreign expenditures. There is some nervousness on the part of the countries that have invested huge amounts of funds in the US Treasuries that their capital may not be as secure as used to be believed. China, of course, has the largest amount invested in the US, close to a trillion dollars. Any significant change in the value of the dollar would result in a serious decline in the value of the total holdings the country has accumulated in America.

The countries receiving investments from sovereign funds have their own worries. On two occasions the United States successfully blocked intended investments by these funds in its territory. Last year a Chinese oil company partnered with the country’s fund to acquire an oil refining company in Texas. But it was not granted permission. On another occasion, a Dubai based port operator attempted to buy the P&O a well known port owner in America. This time the authorities used the powers available to them under national security to deny the sale of American assets.

There is no regulatory mechanism to watch the performance of these funds and to determine how they should be treated by the capital receiving countries. One may evolve as the fund managers begin to meet one another in formal settings.The second such meeting was held in Sydney, Australia in early May. Australia is one of the two developed countries – the other is Norway – that has also established a sovereign fund.The Australian reserves come mostly from the sale of minerals with China being the largest buyer. It calls its fund the Future Fund emphasising, one of its most important aspect: it is creating an asset base to be used in the future when the country’s mineral wealth begins to run out.

Two dozen members of the Forum of Sovereign Wealth Funds were at the meeting concerned mostly with what they called “uneven treatment”. At the same time they have begun to develop voluntary guidelines to improve transparency and governance. In this they are being helped by the IMF which, in 2007, began work with SWF to develop best practices, working with Abu Dhabi’s Investment Authority and Australia’s Future Fund. Leading funds adopted the guidelines that were developed at a meeting in Santiago, Chile held in 2008. They are called the Santiago Principles. David Murray, the head of the Australian fund said in his opening address to the forum that the group was working with multilateral agencies such as the Organisation for Economic Cooperation and Development and some United Nations bodies to foster fair treatment of the funds.

There was great clamour for transparency in the West with the sovereign funds invested heavily in the go-go markets in the early 2000s. The funds were asked to publish annual reports providing list of the assets they held. Most funds were not prepared to go along. Singapore’s Temasek was an exception which produces annual reports. China Investment Corporation that manages $200 billion of assets was not prepared to do this, fearing political pressure in the United States to liquidate some of the assets the people there may regard as being against national security. As these efforts develop it is important that countries such as Islamabad keep watch, taking care that the frameworks that evolve protect their interest as well.

It is incumbent upon the policymakers in Islamabad to develop good understanding of these relatively new instruments of finance and also develop a policy framework within which approach will be made to them to secure resources either for development or for meeting short-term capital needs.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]In the context of terror[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 15 Jun, 2010[/B]

IN a speech at a conference in May in New Delhi, I told my Indian audience that there are no permanent trends in the lives of nations. The fact that Pakistan had slipped badly over the last quarter of a century while India had risen did not necessarily mean that these trends would persist.

Using the data assembled by some Indian economists I said that for 40 years after achieving independence Pakistan was the rising star of South Asia while India was caught in what the Indians themselves called the Hindu rate of growth.

For several years income per head of the Pakistani population was much higher than that in India. Now the situation has reversed. Could the situation change for Pakistan? This could happen if Islamabad and Washington act wisely.

In the National Security Strategy (NSS) of the Obama administration India is regarded as one of the countries that will be part of the group that will constitute the “21st century centres of influence”. However, Pakistan along with Afghanistan is described as “the epicentre of the violent extremism practised by Al Qaeda. The danger from this region will only grow if its security slides backward” with the Taliban controlling large swathes of territory. I don’t think it has been fully appreciated in Pakistan that the attempted bombing of Times Square was a traumatic event for the government and the US people. It destroyed the assumption that people of Pakistani origin — also those who had come from other Muslim countries had settled in the US and were making a decent living — were not receptive to the kinds of stresses and pressures in so many parts of the Muslim world that had persuaded many individuals to try to hurt America.

The problem of Islamic extremism is not an American problem; it is one created by the way some elements in the Muslim world see the US. It was this belief that led President Obama to give a major address last year in Cairo. The theme of the address was America’s relations with the Muslim world. The Cairo speech was the new president’s attempt to repair his country’s tattered relations with Muslim states.

The Faisal Shahzad affair stood that assumption on its head. It showed that there were people living within the Muslim community in the United States who were prepared to do damage to the US even though their adopted homeland had extended a welcoming hand to them. The fact that Shahzad may have been influenced by people he met during an extended stay in Pakistan before he attempted to explode his improvised bomb further complicated US-Pakistan relations. This places additional burden on Pakistan. It must not only address domestic terrorism but also ensure that the perverted ideology that supports it does not get exported to countries where there are sizeable communities of people of Pakistani origin.

In spite of the advances made by the Pakistani military in beating back the Taliban from some of the areas where they had established control, their influence has not been markedly reduced. There are almost daily reminders that the Taliban can inflict heavy damage on the Pakistani state and society and on the assets belonging to its allies, especially the US. A recent example of this is the attack on a Nato fuel convoy near Islamabad that destroyed a number of vehicles. In the light of such developments how does the US perceive its future ties with Pakistan, the second largest country in South Asia in terms of the size of population and economy? A related question: why does it matter for Pakistan that at this point in time Washington looks at it through the prism of terrorism?

The NSS covers widely the way Washington views its relationship with Islamabad. “…[W]e will foster a relationship with Pakistan founded upon mutual interests and mutual respect. To defeat violent extremists who threaten both of our countries we will strengthen Pakistan’s capacity to target violent extremists within its borders and continue to provide security assistance to support those efforts,” says the strategy statement. But the United States promises to go beyond the use of force to contain terrorist activities in Pakistan and work to alter the conditions that invite some segments of the country’s very young population to join the extremist ranks. This will require both political and economic development.

“To strengthen Pakistan’s democracy and development, we will provide substantial assistance responsive to the needs of the Pakistani people, and sustain a long-term partnership committed to Pakistan’s future. This strategic partnership that we are developing with Pakistan includes deepening cooperation in a broad range of areas, addressing both security and civilian challenges, and we will continue to expand those ties through our engagement with Pakistan in years to come.”

There are at least two elements in this strategy that should please the Pakistani people: one, the commitment that the United States will stay involved with the country for a long time to come. Unlike the late 1980s, Washington will not walk out as soon as some solution is found to the Afghan problem. Second, the Americans will help not only with the strengthening of Pakistan’s security apparatus, but also with social and economic development.

Both are positive policy positions. But the fact remains that the basis of the relationship with Pakistan will be in the context of terrorism and Pakistan’s involvement in it. A great deal more will need to happen in the country before it can aspire to reach the status attained by India — that of being regarded as a centre of influence in the world. Being the sixth largest country in the world in terms of the size of its population that is something reasonable to aspire to but that would require a complete reorientation of public policy.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Look out for the neighbourhood changes[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 21 june, 2010[/B]


NOW that Pakistan has a new economic team in place – a new finance minister and a new deputy chairman of the Planning Commission – this may be a good time to rethink the way the country should be planning for its future. In doing so it should look at the changing world outside its borders, in particular at the opportunities that are being created in the country’s immediate neighbourhood.
For decades, economic policymaking was focused on domestic issues. The world outside was never factored in to the strategy for development. This has to change in light of the significant developments that are taking place in the structures of the global production and trading systems. There are also important changes in the world of finance.

For a country that remains dependent on external flows in order not only to pay for investment but also to help it meet its external obligations, the restructuring of global finance must be fully understood. In the article in this space last week, I took a look at the emergence of sovereign funds as an important source of finance for the capital-short countries of the world, both developed and developing. The subject today is the development in Pakistan’s immediate neighbourhood. All the countries that share borders with Pakistan are experiencing enormous changes that could have a bearing on the future of its economy. These should be noted by our policymak ers, in particular those who now have responsibility for finance and planning. Afghanistan, Iran, India and China are all going though changes, some positive and some negative. All of them matter for Pakistan.

Given its high rate of economic growth and industrial expansion, China’s appetite for natural resources – particularly energy and material – is practically insatiable. It is making massive investments in places such as Afghanistan and the Middle East to import the materials it needs. Some of this could be transported through trade corridors that connect China through Pakistan with these sources of supply India also has natural resources and consumer goods to export to Pakistan, Afghanistan and points beyond. Those destined for Afghanistan and Central Asia could be transported through Pakistan. Gas from Iran and the Middle East is needed by both China and India, two giant economies that are short of energy. This could flow through Pakistan from the several points of origin to several points of consumption. Pakistan, in other words, could become a major artery of commerce for the fast developing and rapidly changing areas around its many borders.

For that to happen, a major change will be required in Pakistan’s position with respect to the use of its territory for the purpose of transit. Whenever I have discussed this possibility with the senior leaders of Pakistan, I have been told that security and geo-political considerations exclude the possibility of giving transit rights to India for trade with the countries it cannot reach via land.

That is a mistake for several reasons. The first is simply a cost-benefit issue.

Before taking such a firm position, Pakistan should carefully study the benefits that would accrue to the economy if India was allowed to use the country’s territory for trade. Once an estimate is available – say the benefit to the Pakistani economy is equivalent to one per cent of the country’s gross domestic product every year – then Islamabad would know what it is sacrificing in terms of potential growth by not granting transit rights to India through its territory.

What kind of benefits Pakistan could expect from the use by India of its territory for international commerce? To begin with it will increase the use of the motorway system that Pakistan has constructed at a great cost to the economy. The system is underused. By charging Indian trucks and buses significant transit fees, the country would not only recoup some of the investments it has made. It will also be able to generate the revenues for expanding the system.

The current system links Lahore with Peshawar with a world-class motorway. This could be extended east to the border with China, northwest to the border with Iran and west to Karachi and Gwadar to provide Afghanistan, China and India access to the resources of the Middle East and the region’s rapidly developing markets.

Pakistan also needs to rethink its international trade strategy. The focus has always been on market access to the world’s developed countries – the United States and the European Union. And when Islamabad talks about market ac cess the reference is to the export of textiles. Both elements of this trade strategy are misplaced. Even though textiles are the largest component of Pakistan’s industrial sector and provide employment to a significant proportion of the workforce engaged in manufacturing, this is not where the future is if the country wishes to build a strong and dynamic economy.

The country has to focus on the development of industries that have a rapidly increasing demand in the global market place, where a large number of new workers can find employment, where Pakistan can accommodate its youth in well paying jobs, and where there are important forward and backward linkages. These objectives won’t be easily realised in the sector of textiles.

Our planners have to concentrate their attention on the development of modern services – the IT and communication sector, the sectors of health and education, the activities related to sports and culture – which could provide employment for millions of skilled and well trained workers. A simple calculation tells us that employing an additional one million people in the IT sector alone can provide additional exports worth $20 billion a year.

The other important adjustment that needs to be made is to find markets closer at home than search for them in the places that are very distant from Pakistan. The gravity model of trade tells us that destinations of exports should be largely the countries in the neighbourhood. Pakistan is uniquely placed in this respect. It has as its immediate neighbours two countries that are the world’s most rapidly growing economies and have rapidly expanding markets. Both China and India should be the preferred destinations of the export industry in Pakistan rather than the United States and the European Union.

This brings me back to the need for aggressively developing trade and economic relations with India. I am aware of the fact that there are important constituencies in India that are against developing close relations with Pakistan. The same is true for Pakistan. Serving these two groups is not in the larger interest of both India and Pakistan.

At the “Aman ki Asha” conference held in New Delhi in May this year at which I was one of the keynote speakers, I was asked why Pakistan had not granted the “most favoured nation” status to India which it is required to do under the WTO. My answer was simple and honest. I said that the reason why that had not happened was once given to me by former President Pervez Musharraf. When I pressed him on that issue by saying that it was in Pakistan’s own interest to extend the MFN status to India, he said that the problem was that the term “most favoured nation” did not translate well in Urdu.

The conservative Urdu press would play up the issue that Pakistan had declared India to be the “nahaet pasandeeda mulk.”That would be hard for his government. The United States was once faced with the same quandary with respect to its trade relations with China. It dropped the term MFN in favour of trade promotion activity. Pakistan could do something similar.

The main conclusion that we should draw from this analysis is that a serious reconsideration of our economic strategy is required to factor in the opportunities available in the country’s immediate neighbourhood.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Where are the answers?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 22 Jun, 2010[/B]

PAKISTAN has struggled with two questions ever since its birth as an independent state almost 63 years ago.

The first focuses on what kind of a Muslim state should it become. Should it be an Islamic state or a state that blends a Muslim way of life with the western — or Indian — style of secularism.

The second focuses on the type of alliances it should seek with other states that would strengthen its national security. Should it work with the West to protect itself against India’s real or perceived designs? Should it align itself with the Arab world and aim to become an important component in the pan-Islamic community? Or should it look to Afghanistan, Iran and Turkey, the non-Arab countries in the Muslim world?

These questions were not important in the minds of Mohammad Ali Jinnah and his associates who founded Pakistan. They did not anticipate the massive transfer of population that occurred soon after the partition of British India that turned Pakistan from a Muslim-majority to a predominantly Muslim country. Had a sizeable number of non-Muslims continued to live in Pakistan after independence — before independence about 30 per cent of the population of the areas that would become Pakistan was non-Muslim — these questions would not have acquired the significance they did. This is one reason why they were not asked, let alone answered, by the founders of the country.

Had East Pakistan not separated and one of its part become the independent state of Bangladesh, the Bengali influence on West Pakistan would have forced it to remain a more liberal society. These are two important ‘what ifs…?’ of Pakistan’s history. These questions force us to ask another: where would the country have been today had certain things not happened? But they did happen and the present set of policymakers must deal with the situation as it is today.

What should inform the making of foreign policy in a country in Pakistan’s situation? Of the many available options the following four could become the basis of policymaking. One, we need to address the question of whether Pakistan should continue to be concerned about India’s seeming designs towards it and continue to develop appropriate mechanisms for defending itself. That, after all, was the focus of policymaking in external affairs for much of the country’s history.

Two, as it is a predominantly Muslim country we have to ask whether it should follow the rest of the Muslim world in defining its place in the global community. But the Muslim world does not sing from the same sheet of music. Which of the various Muslim blocs should Islamabad follow in designing its approach?

Three, it is also a country that has seriously mismanaged its economy for the last several decades and has become dependent on foreign largesse for economic survival. In these circumstances, should it work with the world so that the flow of the external resources it needs continues?

Four, we must also ask how much attention should policymakers give to the enormously important changes occurring in Pakistan’s immediate neighbourhood. We are seeing the emergence of China as an economic superpower that is now being courted by the United States as a partner. We are also witnessing the rise of India as a major economic presence in the global system. How much weight should be given to these developments in the making of foreign policy?

My answer to these questions will take us towards the adoption of a composite approach. I would like to see Islamabad change its attitude towards India in a fundamental way. It should seek to become a partner of that country in helping South Asia catch up with the rest of the continent and not continue to be distracted by the misplaced fear that New Delhi is bent upon hurting its neighbour.

The New York Times recently carried a story about the extremist group Lashkar-i-Taiba being encouraged by some Pakistani elements to carry out anti-India operations in Afghanistan. With the United States having declared its intention of beginning to pull out of that country next year, a vacuum is likely to occur that will suck in a number of regional powers, including India and Pakistan, into Afghanistan. To prepare itself for that outcome, the newspaper alleges that many in Pakistan have begun to support extremist groups to fight a proxy war in Afghanistan. This, as we know from our recent history, is a dangerous course to pursue.

The formulation of foreign policy can become difficult if the objectives being sought are not clearly defined. The questions regarding the four observations above — the approach towards India, the role of Islamic ideology, the importance of securing a flow of finance on a sustained basis, the importance of focusing on Asia’s rising powers — should not only be asked they must also be clearly answered. It is clear to me that the time has come when we need to totally reorient our external policy away from constant preoccupation with India and basing it on the vaguely defined interests of the Muslim world.

We should shape our policies towards the world by focusing on only one thing: the need to improve our economic situation and prospects so that a better life can be delivered to the rapidly expanding population. Such an approach would have many outcomes. Of these the following three will be very important.

First, we will begin to view India from a different angle. That country’s rapid rise can become an asset for Pakistan if we are prepared to cast off the burden of history and seek to align our economy with the one that is rapidly developing across the border. Two, we will pay much greater attention to the continent of Asia in seeking markets for our products and sources of finance. Three, we will dispense with the use of Islamic ideology to determine the way we look at the Muslim world. Foreign relations will be defined totally on the basis of economics. Perhaps a clear statement by the new managers of the economy that economics will be the foundation on which we will build the country will help to clear the air.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Trilateral deal for hidden assets[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 28 june, 2010[/B]

THERE is an urgent need for Pakistan to define its economic future in the context of what is happening in the countries it borders. Major developments are occurring in all the countries around Pakistan as well as in those that are not far from it.
In this context let us take a look at Afghanistan, not at the way the American led war is going in the country but with reference to the possibility that the areas in around Afghanistan may become the centre of global mining activity. The recent reports in a section of the American press about the unexploited mineral riches in Afghanistan lend further substance to the approach I have been advocating.

“The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself”, wrote The New York Times in a story carried by the newspaper on the front page of its issue of June 14.

“The value of the newly discovered mineral deposits dwarfs the size of Afghanistan’s existing war-bedraggled economy, which is based largely on opium production and narcotics trafficking as well as aid from the United States and other industrialised countries. Afghanistan’s gross domestic product is only $12 billion”. Afghan officials, in commenting on the report said that the American estimates were on the low side: the total value of the deposits may be as high as $3 trillion.

The story of how this conclusion was arrived at is, in a way, the story of the recent conflict in Afghanistan. The first indication that the country may have very large deposits of a variety of minerals came from the investigations done by the Soviet experts when the country was occupied by its soldiers. Maps and data produced by the Soviet scientists were deposited at the Afghan Geological Survey in Kabul but were removed by the Afghans who had also worked on the investigations.

The decision to remove this material was taken when the country was run over by the Taliban in the late 1990s. They were returned only after the Taliban were defeated by the Americans. However, this material did not come to the attention of the Americans until 2004 when geologists from that country were sent to Afghanistan as a part of a broader reconstruction effort.

The Americans decided to carry out a series of aerial surveys after they had studied the charts prepared by the Soviets. This was done in 2006 using advanced gravity and magnetic measuring equipment attached to an aircraft.This way about 70 per cent of the country’s area was surveyed and mapped. The data was so promising that an even more sophisticated investigation was carried out a year later. The results were astonishing but were largely ignored for another two years.

The Americans were too preoccupied with Iraq to spend much time on this discovery. It was only when the conflict in Iraq wound down that Afghanistan reappeared on the American radar screen. Under the new administration of President Barack Obama America turned its attention towards Afghanistan. It was then that the Washington began to look at the country’s economic future. The Americans and its NATO allies were worried that an insurgency that was fed not just by ideology but also by the production and trading of drugs would be difficult to bring under control.

That was the lesson the Americans had learnt in the long drawn-out fight against drug trafficking in Colombia. American aid to Afghanistan is likely to de cline significantly once Washington begins to pull out its troops beginning next summer. In that case the drug economy and the associated drug culture will take an even greater hold over the country. These will also seep into Pakistan.

In 2009 a Pentagon task force that had worked on developing business opportunities in Iraq was transferred to Afghanistan and was told of the studies done by the Soviets followed by the investigations by a series of America teams. The Pentagon team firmed up the estimates and briefed Defence Secretary Robert Gates about their findings. “For the geologists who are now scouring some of the most remote stretches of Afghanistan to complete the technical studies necessary before the international bidding process is begun there is growing sense that they are in the midst of one of the great discoveries of their careers”, continued The New York Times report cited above.

What is particularly exciting for the geologists is that Afghanistan may have large deposits of some of the rare minerals the demand for which is increasing because of the development of new technologies. Lithium is one such material, an important ingredient in batteries that power not only mobile phones and computers but also hybrid automobiles. Ghazni province showed the potential for lithium deposits as large as those of Bolivia in Latin America which now has the world’s largest known reserves of this important mineral.

Other finds include large deposits of niobium, a soft metal used in producing superconducting steels. The Pentagon estimates put the value of this particular deposit at $81.2 billion, third in importance among the 22 minerals identified by the geologists. Iron with estimated value of $421 billion and copper at $274 billion are the two largest finds.

Would the discovery of these potential riches make Afghanistan rich almost overnight? It will take time before the country becomes a mining giant. The initial reaction of the large mining companies is that of caution. Poor security particularly in the areas that have the largest potential is not the only reason why Western companies are not likely to move into the country with any kind of speed.

Afghanistan’s mining laws are also a problem. Even if a company invests heavily and discovers exploitable reserves, the government can move in and assume control over them and rebid the contract. To remedy this, the government has turned to the World Bank to update the laws and also draw up standard bidding documents to minimize the scope for corruption.

The minister in charge of mining in the previous Karzai government was removed from office when reports began to circulate that he had enriched himself mightily by taking bribes from some of the mining companies that were admitted into the country. If the Western companies are slow to enter Afghanistan, China, which already has a large mining project in the country is likely to increase its involvement.

What do these developments mean for Pakistan? If we look at the geological map identifying the various deposits in Afghanistan, several of them are right on the border with Pakistan.There is no reason why these mineral deposits should not extend into Balochistan and parts of the Pakistani tribal belt. Copper is already being mined by the Chinese in Balochistan and there are reports of large deposits of the metal in the areas nearby.

It would be a good idea to create a trilateral arrangement involving Afghanistan, China and Pakistan to plan for the exploitation, processing and transport of this enormously large mineral wealth. This could transform the Pakistani economy along with the economy of Afghanistan.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Major policy rethink[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER] Democracies function well only when the citizenry is educated and informed about the issues. This is where the media and civil society enter the picture.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, 29 Jun, 2010[/B]


THE great virtue of democrat ic systems is that the policies governments adopt reflect the will of the people. While Pakis tan is tending towards the adop tion of democracy as the prefer red system of governance it is quite clear that the country is not there as yet.
If it had become a fully representative system some of the approaches being pursued in foreign affairs would not have been adopted.

In this space last week I argued that economics rather than ideology or histo ry’s many burdens should inform the making of public policy. That is not hap pening. While people want the govern ment to focus on their economic situation that has markedly deteriorated over the last several years, some of the powerful policymakers continue to focus on what for the common citizens must be marginal issues. This is happening since the people have a poor voice in the making of policy.

In weak political systems strong institutions fill the vacuum. This happened in the case of Pakistan when first the powerful civil service and then the military stepped in and dominated policymaking for most of the country’s turbulent history. Even when these institutions believed that they were working for the good of the country and its citizenry they could not possibly forsake their narrower interests. No matter how dysfunctional a political system is — and Pakistan’s system at this time is not functioning well — it is still better than a system that has a narrow base.

But the transition to a more representative system will not be smooth or easy. In moving forward with the development of the political system, those who are taking the lead will need to take account of what economists call ‘path dependence’. This means that the past has a strong influence on the present. The path followed in the past cannot be easily abandoned for something that is new. That is certainly the case in Pakistan, a country going through major political change. A great deal of caution will have to be shown so that the strong interests that have dominated the system don’t reassert themselves. But the fear that that might happen should not paralyse the move towards democracy.

In the case of Pakistan, the political system was not made up of three components that have given, for instance, the American structure the checks and balances the country’s founding fathers recognised were essential to ensure stability. They strongly believed that no single segment of the population should be able to dominate to the disadvantage of the others. In pursuit of this objective they divided responsibilities among the executive, legislative and judicial branches of the government. If one of these attempted domination, it was checked by the other two.

The latest manifestation of this is the way the supreme court, under the leadership of John Roberts, a highly conservative judge, is attempting to contain the pursuit of the ‘big government’ ap proach being followed by the administration headed by President Barack Obama. This conflict will ultimately get resolved by the American Congress as it reinterprets the country’s constitution in light of what the people want now and not what the founders thought should be the principles of governance.

In Pakistan’s case, the political system has four rather than three branches. The military is the fourth component. While it has stepped back to allow the political system to have the space in which it can develop further, it is no secret that it is happy to intervene when it believes that the other branches of the government are putting the country’s security at risk.

Two interventions in particular — in 1958 when Gen Ayub Khan overthrew a legally constituted government and again in 1977 when Gen Ziaul Haq removed Prime Minister Zulfikar Ali Bhutto from power — the military came in, said its leaders, ‘to save the country from meltdown’. The two other interventions were prompted by personal ambition. But how could the military decide what posed risks to the country’s security?

The Zia period provides an interesting case study of how the will of one man came to prevail over the will of society. Zia ordered Islamisation on the pretext that that is what the people had wanted all along. By moving in that direction, he set the country on a course from which it will take a long time and a great deal of effort to depart.

How did Zia conclude that Islamisation is what people wanted when the people had not voted in significant numbers for any Islamic party? It was not the will of the people that Zia was minding but his own. What prompted Zia to fight the American war against the Soviet occupation of Afghanistan by creating a new force of Islamic fighters that eventually morphed into the Taliban? Had the issue been openly debated the result may have been very different.

The current ambivalence of Islamabad towards two of the more important policies that will shape the country’s future reflects the tussle for influence between the military and the representatives of the people. One example of this is the way the military establishment views India. The military continues to see India as the main threat to Pakistan’s security and continues to believe that in Afghanistan it should seek strategic depth in case of hostile activity by India. In other words, the military continues to place India’s seeming hostility towards Pakistan at the centre of its concerns.

Whether suspicions about India’s intentions should preoccupy the policymakers to the extent that they inhibit the economic development of the country and the welfare of the citizenry is something that needs to be debated openly and by the representatives of the people in the forum that is meant to serve that purpose. That, of course, is the National Assembly.

But, as is often said, democracies function well only when the citizenry is well educated and informed about the issues. This is where the media and the civil society enter the picture. They too have to shed some of the old biases and look at the situation anew in light of the enormous changes that have occurred inside and outside Pakistan. If that were to happen — and there are indications that may be occurring — we may see a major change in the way we view the world outside our borders.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Austerity approach and the fear of depression[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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

MOST international structures owe their existence to crises. They were created to deal with a critical situation that could not be handled by existing institutions.

The G-20, a group of states and institutions, owes its existence to the Asian financial crisis of 1996-97 when the countries that were affected needed to undertake changes in their financial systems in return for infusion of cash from rich countries and multilateral institutions.

Finance ministers from the world’s largest economies, developed and developing, were asked to work with international financial institutions to devise the rules that would guide the troubled countries out of the crises they faced.

The G-20 further evolved when the world economy went into what came to be called the Great Recession of 2008-09. It was reconstituted at the level of the heads of state in November 2008 and met for the first time in Washington under the chairmanship of George W. Bush, the lame-duck US president. The group met for the fourth time in Toronto on June 26-27 since its reincarnation in Washington.

A global economic approach that works requires a consensus among the major players in the world economy. A consensus is reached more easily when there is fear that is shared. That was the case in November 2008. They were afraid that the world was headed towards another depression and decided to act in concert.

They agreed to have their governments use the budget to stimulate their economies. This was done more aggressively by China, the United States and some countries in East Asia but more cautiously by the Europeans and Japan. John Maynard Keynes, the British economist who had urged the world in the 1930s to spend its way out of the Great Depression, was back in fashion with the policymakers.

There is a consensus among economists that these moves saved the world from another depression. But the governments in Europe as well as North America failed to convince the electorate and the markets that they had taken the right approach. The markets as well as the electorate began to punish the governments that, in their view, had irresponsibly relied on the printing press to save their economies. The new administrations that came into office ( as in Britain) as well as those that survived (as in Germany) became cautious as the spreads widened between the government paper issued by the countries that were deemed to be fiscally prudent and those that were regarded as profligate. German Chancellor Angela Merkel argued at Toronto where the G20 met for the fourth time since November 2008 that these widening spreads will increase the cost of carrying a large debt.

As should have been expected, the differences in the approach towards handling the 2008-09 crisis – more aggressive in the United States and East Asia and more restrained in Europe – showed in terms of the rates of growth in their national products. In Germany, the world’s cheerleader for fiscal continence, the GDP increased by only 0.2 per cent in the first quarter of 2010. France, also led by a conservative president, did even less well, with GDP increasing by a bare tenth of one per cent in the same quarter.

The UK, whose new government, believing in the election rhetoric of its newly installed leadership, took the baton in the race to cut expenditure, adopting austerity as the governing principle. It saw its GDP increase by only 0.3 per cent. Among developed economies, the US that had followed Keynes more aggressively than other industrial economies moved ahead briskly by 0.8 per cent. Japan outdid the industrial world with a rate of growth of 1.1 per cent. China, of course, led the field with the GDP increasing in the year’s first quarter by 13 per cent.

That the politicians differed about how to proceed – President Barack Obama cautioned the leaders assembled at Toronto that it would not be right to head for the exit together – was not surprising. They have to be mindful about the views of the electorate. What is troubling is the sharp difference among the academics who occupy the same space in the ideological spectrum.Paul Krugman, the Nobel Prize winning columnist of The New York Times, fears that without continuing stimulation the world is likely to head towards a depression. If that were to happen this would the third time such a sharp downturn would have occurred in the last century and half.

“Recessions are common; depressions are rare”, he wrote in a recent article. “There were only two eras in economic history that were widely described as ‘depressions’ at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31. We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost – to the world economy and above all, to the millions of lives blighted by the absence of jobs – will nonetheless be immense”.

But Jeffrey Sachs, an economist of equal calibre differs. He dismissed the fear of either a double-dip recession or of a depression. In an article written for the Financial Times, he argued that those who were urging governments to keep on spending to deal with Great Recession of 2008-09 “ignored one of the key elements of modern macroeconomics: that the result of fiscal policy depends not only on current taxes and spending but also on their expected trajectories in the future”.

He is of the view that the Keynesian stimulus used by several governments to deal with the 2008-09 economic crisis “was premised on four dubious propositions: that it was needed to prevent a global depression; that a short-term fiscal boost would jump-start the economy; that ‘shovel-ready projects’ could combine short-term cyclical and long-term structural agendas; and, last, that the rapid rise of public debt occasioned by stimulus need not be a concern. That these ideas were so widely accepted was a testament to the perennial political attractiveness of tax cuts and spending increases.”

The communiqué issued by G-20 on 27 June attempted to paper over these differences among countries and experts. The leaders agreed on a non-binding timetable for cutting deficits and curbing the growth of official debt, but acknowledged the need to move carefully so that reductions in spending did not set back fragile global recovery.
“There is a risk that synchronised fiscal adjustment across several major economies could adversely impact the recovery”, the joint statement said. The group accepted the fiscal deficit target – halving it by 2013 – pushed by the Canadian prime minister who was the host of the meeting. However, a number of caveats were added to the communiqué. “There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth.”

At the Toronto meeting, therefore, the G-20 countries decided to follow their own separate ways rather than operate within a globally accepted policy framework as they had done at the previous three summits.

The result of this will be that the Europeans will constrain their economic growth rate by being fiscally prudent, while the East Asians led by China – and to a lesser extent also India –will continue to promote growth while restructuring their economies. The US will come out somewhere in between. Following this meeting one should see a widening of the growth gap between the old and new industrial economies. Asia will see a quickening in the pace at which it is playing the “catch-up game.”

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]America’s Afghan strategy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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


A RECENT article in Rolling Stone magazine by a young freelance writer that appeared under the title of ‘The Runaway General’ created a crisis in Washington. There is no doubt that the contempt so openly shown by Gen Stanley McChrystal, the then American commander in Afghanistan and the subject of the article, for the senior civilian leadership could not be tolerated by President Barack Obama.

This was the case especially when the US constitution makes it clear that the military is answerable to civilian authority. The general’s impertinence had to be dealt with.

As one commentator wrote, “the moment he pulled the trigger, there was near-universal agreement that President Obama had done the inevitable thing, the right thing and, best of all, the bold thing”. But the general’s removal brought the US strategy in Afghanistan back in focus. In its attempt to stabilise Afghanistan by following what is called the ‘counter-insurgency’ strategy, or COIN, the US seems to be losing its sense of direction. Will the change of command pull back Afghanistan from the edge of an abyss?

Given the circumstances, a change of command was needed to give an unambiguous signal that the civilian leadership would not tolerate insubordination by the military. The choice of Gen David Petraeus as the replacement sent another important signal: that there would be little or no change in the counterinsurgency strategy being followed to achieve the American objectives in Afghanistan. The stated objective was to clear Al Qaeda out of Afghanistan.

But the second signal did not hide the fact that there are many in Washington who believe that America is in deep trouble in Afghanistan. As a senior adviser of the dismissed general told the Rolling Stone presciently, “If Americans started paying attention to this war, it would become less popular”.

What is interesting about the Rolling Stone article is not just what it said about the way the top American general felt about his bosses but also the conclusion reached by the author as to where American strategy stood in Afghanistan. “Whatever the nature of the new plan [for Kandahar], the delay underscores the flaws of counterinsurgency. After nine years of war, the Taliban simply remain too strongly entrenched for the US military to openly attack. The very people that COIN seeks to win over — the Afghan people — do not want us there. Our supposed ally, President Karzai, used his influence to delay the offensive, and the massive aid championed by McChrystal is likely to make things worse,” wrote Michael Hastings, the article’s author.

He quoted Tuft University’s Andrew Wilder to underscore the perverse impact of one element of the COIN strategy. “A tsunami of cash fuels corruption, delegitimises the government and creates an environment where we are picking winners and losers — a process that fuels resentment and hostility among the civilian population. So far counterinsurgency has succeeded in creating a never-ending demand for the primary product supplied by the military — perpetual war.”

The reference to the change of plans in the Rolling Stone article is to the postponement of the Kandahar operation that Gen McChrystal had announced for August. However, the experience of a much smaller operation in Marja, a small urban centre of only 60,000 people in Helmand province, convinced the Americans that they needed more time to prepare. Not only did they need more soldiers to overpower the large Taliban force that was present in Kandahar, a city of several hundred thousands, but also greater commitment of follow-up by the Karzai regime.

The province was dominated by Ahmed Wali Karzai, the president’s half brother, who is alleged to have amassed an enormous amount of personal wealth through corrupt practices. He was said to be deeply involved in the flourishing drug economy of the province. Handing over the province to him after expelling the Taliban hardly met the goals of the counterinsurgency strategy.

In moving forward President Obama faces two obstacles: fast diminishing support at home for what he had once called America’s war of necessity, an unpopular government in Afghanistan, led by an unpredictable president and Pakistan’s changing perception of its interest in its neighbour.

It is clear that by turning to Gen Petraeus to lead the Afghan effort, the American president was providing some comfort to the conservatives in his country who had begun to doubt his commitment to the war in Afghanistan. Gen McChrystal was popular with this group and his removal was viewed with considerable apprehension. But the right also has a great deal of faith in his successor, confirmed recently by the Senate.

According to Robert Kagan, a powerful voice in neo-conservative circles, the appointment of Petraeus “signalled Obama’s determination to succeed in Afghanistan, despite the chorus of wise counselling, as our wise men always seem to do, a rapid retreat. Those on the region who have been calculating on an American departure in July 2011, regardless of conditions on the ground, should think again. That date was never very realistic, and the odds that Petraeus will counsel a premature withdrawal — or that he will be ordered to withdraw regardless of his assessment of the situation — is infinitesimal”.

This then is a time of great uncertainty about the future of the American enterprise in Afghanistan. There seems to be a general agreement that a negotiated settlement is the only way out of this conundrum. But how to get there is not clear. Some of this uncertainty may be removed when the operation in Kandahar materialises. A victory at Kandahar would certainly help the Americans and its allies but it will take time before it becomes apparent as to which side has won. Under the COIN philosophy, a military operation must be followed by a palpable improvement in the quality of governance. For that to happen a credible leadership must be available in the wings. That appears not to be the case either in Kandahar or in Kabul.

[B][U][CENTER][SIZE="5"][FONT="Georgia"][COLOR="DarkGreen"]Global Pakistani assets and their volatility[/COLOR][/FONT][/SIZE][/CENTER][/U][/B]

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


PAKISTAN is one of the very few developing countries that place few restrictions on the movement of capital by individuals. China has many restrictions, India even more.

In Pakistan individuals – but not firms – can move money in an out more or less at will, acquire properties outside, and pay no taxes on the returns these properties produce.

The result of this is that a flourishing external market has developed for the Pakistanis. This is made up all kinds physical and financial assets. Nobody knows the size of the external market under Pakistani ownership but given the extent of uncertainty at home it must run into billions of dollars and must be equivalent to a significant proportion of the country’s gross domestic product.

Let us assume that the size of this market is between $20 and $50 billion dollars. This is a pure guess on my part. At the lower end it would constitute 11 per cent of Pakistan’s GDP; at the higher end, some 28 per cent. Assuming a return of around 10 per cent a year – not an exaggerated number given the profits available in Pakistan – this amount of finance employed in Pakistan would add 0.6 to 2.8 per cent to the rate of growth in the national product. If this capital were to come back to the country it would add substantially to the rate of growth of the economy. How can this be done? I will take up this question at the end of the article.

The bulk of the Pakistani investment overseas is in real estate followed by investments in various capital markets. The first market in particular has suffered some spectacular declines in recent years. What happened to real estate in Dubai is not the only example of a market in which Pakistanis heavily invested and which lost its bottom. Most real investments have done poorly in the Middle East, even in the more conservative Saudi Arabia.

There are also large investments in real estate by Pakistanis in the United States – both by those who continue to live in Pakistan as well as those who are part of the Pakistani diaspora in the United States. A significant amount of these investments were in the areas where the housing boom has been punctured thoroughly and a lot of speculative air just went out. There must have been hefty losses suffered by the Pakistani investors in these imploding markets.

Chastened by this experience, the Pakistanis investing abroad have shifted their focus to such East Asian markets such as Malaysia and Singapore. However, as the governments of these jurisdictions recognise, the real estate markets are experiencing bubble-type of investment behaviour there as well. The Singapore government in particular has taken several steps to cool the market. This means while the investments made in these markets may be secure, the returns are not certain since there is no assurance that there will not be capital losses.

What about the capital markets that have attracted considerable Pakistani investments especially since the advent of internet trading? Those who are actively involved in these markets are looking for security as they are in the real estate market and also are attempting to read the likely changes in the currency markets. The latter is a difficult thing to do even for those who are well versed in these matters.

It matters therefore for many very well-to-do Pakistanis how the fluctuations in the more important currencies in the world are creating turbulence in what financial people call the wealth market. Factoring in these fluctuations in the rates of return provided by investment in foreign assets must be taken into account by those who have entered these markets. As a foreign analyst put it recently in an article, “If you have a global portfolio, chances are that you’re feeling more pain these days than investors who have kept their money close to home.”

There have been significant up and down movements in most of the world’s more important currencies. The dollar index, for instance, that measures the value of the dollar against the more important currencies has seen some wide fluctuations over the last several months. It was at 120 on January 31, 2002 but plunged to 71 on March 31, 2008, recovered to 89 on March 9, 2009, fell back to 74 on November 30 2009, went back again to 78 on December 31, 2009, and rose further to 88 on June 1, 2010.

Pakistani investors must not only watch these movements, they must also assess the likely movements of the domestic currency. Those who invested in dollar denominated assets would have done very well because of the almost 13 per cent increase of the value of the dollar. However, since the value of the Pakistani rupee was relatively stable during this period the returns were lower compared to those that were available when the rupee depreciated from 60 to the dollar to 80 over a few months earlier on. This was a depreciation of 33 per cent but the value of the dollar with respect to other currencies also declined significantly during this time.

Therefore, the profits made by those who invested in euro-based assets must have done very well compared to those who chose the dollar or dollar assets. In other words, fairly complicated calculations have to be done in order to profit from the movements in foreign capital and financial markets.

How have the Pakistani capital markets performed compared to some of the other large markets around the globe? This is an important question to determine whether those who chose to take capital out of the country did the right thing if we were to look only at personal and not at national interest. One answer comes from The Wall Street Journal that estimated the performance of 78 markets in the world. Among these Pakistan ranked the 36th, showing a decline of 34.4 per cent. As against this the markets in the UK. and the United States declined by 27 and 31 per cent respectively. These two are the favourite places for Pakistani portfolio investors outside their own country.

The difference was not justified by the risks the investors were taking in terms of currency movements. They were certainly not worth the effort if we weigh in with social benefits into the equation. It is interesting to note that Tunisia, Sri Lanka and Chile were by far the best performing markets with increases respectively of 81.2 , 52.9 and 16.2 per cent. The Indian market by declining by only 13.1 per cent did better than that of Pakistan in this period. Of the 78 markets, only six markets had improvements; all other showed declines.

What needs to be done in order to stem the flight of capital from the country and have it stay at home and work for the domestic economy? The most obvious answer is to improve security in the country so that capital is not driven out because of fear that the assets in which it is put will be destroyed or not give acceptable rates of return. However, the most effective instrument for keeping capital deployed at home is to increase the cost of investing it abroad.

This can be done by ensuring that all incomes are appropriately taxed no matter where they are generated. This is called the global income approach to taxation. If those who send money abroad are aware that the incomes earned abroad will also get taxed they will factor that in their calculations. This should slow down the rate of capital outflow.

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

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


BY the time this column appears in print President Asif Ali Zardari would have concluded his fifth visit to China since taking office less than two years ago. The Zardari visit came at a time when Pakistan faces a difficult economic situation and while China is engaged in the process of redefining its economic objectives.

In a long paper I had written a few months ago for the Institute of South Asian Studies at Singapore, I had argued that under China’s leadership Asia — or most parts of the large continent — was catching up with the more advanced countries in the global economy.

Some time during the course of 2010, China will overtake Japan as the second largest economy in the world after the United States. China’s rise, I had argued, would be different for Asia from the earlier rise of Japan. While Japan had anchored its economy in the West, China was focusing to a much greater extent on leading the rest of Asia towards modernisation.

I discussed this finding with some of the senior leaders of the Chinese ministry of finance. They found the conclusion interesting and plausible. This discussion took place in Beijing while President Zardari was in China. It raised in my mind the question of whether the discussions the Pakistani team was having recognised the importance for their country of the massive structural change that was occurring in China. This will be of great consequence for the future of the Chinese economy, its position in the global economic system and its relations with the countries in its immediate neighbourhood.

How should Pakistan respond to China’s evolving situation in the global system given the long relationship between the two countries is a question that I will take up in a later column. Today my focus will be on the symbolism of the latest Zardari visit to China and the role he would like to see China play in helping his country deal with the energy crisis that has already taken a heavy toll on the economy.

This time President Zardari was escorted to the Great Hall of the People in Beijing by his two daughters. China Daily covered the Pakistani president’s visit quite extensively. It carried his picture alongside President Hu Jintao on the first page of the newspaper. It quoted the Pakistani president telling the Chinese leader that his daughters wanted “very much to see you in person” hoping the meeting would inspire the younger Pakistani generation to continue its “all weather and time-tested friendship with its Asian neighbour.” The Chinese press was touched by this gesture carrying the story of the meeting under the title, ‘Children lead the way into the meeting’.

It was reported that since the Pakistani president assumed his present office the two countries had concluded 60 agreements, opening up a number of new avenues for Chinese investment in Pakistan. The Hu-Zardari meeting on July 7 lasted for 100 minutes and witnessed the signing of six deals in the areas of law, housing, agriculture and media cooperation. These were all new areas of collaboration between the two countries. The visit and the associated meetings also covered some of the traditional areas in which the two countries have been involved. The most important of these is the development of Pakistan’s energy resources.

The Pakistani president told Chinese business heads in Beijing that “Pakistan was facing an acute power shortage and intended to add tens of thousands of megawatts of power to its national grid in the next 25 years through combined hydro, coal, gas, nuclear and renewable energy resources”. The Chinese response was encouraging. According to China Daily “an executive of China’s Three Gorges Corporation which runs the huge hydropower dam in central China, … agreed to invest more than $100bn in two hydropower projects in Pakistan”.

The question of China’s support for developing nuclear power in Pakistan also came up. This issue had acquired some significance following questions raised by the American administration about the understanding China and Pakistan had reached earlier in the area of nuclear power development.

The China National Nuclear Corporation had signed an agreement with the Pakistani government in February of this year to finance the construction of two new reactors. Washington was concerned whether the promised assistance by China to add to the nuclear capacity already built at Chashma in the Punjab was in accordance with Beijing’s international obligations.

Beijing gave repeated assurances to the international community that its current and future nuclear commerce would be in total compliance with its commitment to the Nuclear Non-Proliferation Treaty. This assurance was repeated to the Indian adviser on national security adviser, Shiv Shankar Menon, who left Beijing the day the Pakistani president arrived in the Chinese capital.

Menon spent several days in China during which he met Prime Minister Wen Jiabao. He said before leaving China that he had discussed China’s assistance to Pakistan in the nuclear area. “They told us that what they are doing will be in accordance with their international obligations. We will wait and see where this is going,” he said while talking to the press before leaving for India.

Ye Hailin of the Chinese Academy of Social Sciences spoke on the controversy and said that the Chashma project was legal and also had nothing to do with other countries. He said that China has always been supervised by the International Atomic Energy Agency and future nuclear cooperation with Pakistan would depend on the demand of that country for using nuclear power to meet its large energy shortfall.

“Our cooperation is not a show, not a demonstration. It is decided by our need.” The expression of concern by New Delhi and Washington about the cooperation between Beijing and Islamabad was surprising since they themselves had concluded a deal which was clearly outside the NPT framework. The Americans had used considerable political muscle for the international community to accept their agreement with India.

From the perspective of Pakistan’s current economic needs the Zardari visit seems to have been a success. Whether it will put Pakistan in a position from which the country could draw benefit from China’s changing situation will be discussed later.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Fragile recovery, double-dip, or depression?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


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


IN recent months, economic policy around the world has taken a major wrong turn and, according to some economists, the global economy may be heading towards another recession.
If that were to happen the Great Recession of 2008-09 may turn into the Great Double-dip Recession of 2008-11. This may degenerate into a depression, the first since the late 1930s.

The impact of this on emerging economies is already being felt. India has reported a sharp decline in the rate of increase of industrial output in May. Pakistan will also be affected as some of its export markets lose their dynamism. The main reason for this unhappy turn in events is the policy-induced weakness in aggregate demand. This is more evident in Europe but may also happen in the United States.

Deep political divisions in the United States are preventing the Obama administration from assisting the unemployed as their benefits run out. Republicans in the Senate, with some help from conservative Democrats, have blocked $77 billion in aid to the unemployed proposed by the administration.

The German government has pledged $100 billion in tax increases and spending cuts even though the economy continues to operate well below capacity. The newly installed Cameron-Craig government in London has also opted for austerity. The French are pulling back sharply.

Perhaps most troubling of all is that the G20 governments that recently met in Toronto failed to agree on a common framework for guiding the world economy back to full recovery.

We know from the history of the world economy that when national governments are left to work on their own they are likely to work against each other rather than in support of one another. That happened in the period before the Second World War and produced the Great Depression.

Does this mean that the world is headed not only towards a double-dip recession but perhaps a full-fledged depression? The answer is probably no because the large economies of Asia have not – at least not yet – joined the politically popular austerity drives in the countries on both sides of the Atlantic. Asia may come to the world’ rescue and in the process acquire greater economic heft.

Economic downturns – their depth and duration – are exceedingly hard to predict. This is especially the case when governments actively intervene to shorten their duration and reduce their depth. The 2008-09 downturn, the first since the Great Depression and by far the most severe of the several that have hit the global economy over the last six decades, was supposed to have ended by the time the year 2009 was in its third quarter.The conventional measure – two successive quarters of growth – when applied to this recession seemed to suggest that the recession was over.

According to Christina Romer, the chair of President Barack Obama’s Council of Economic Advisors, the Great Recession will only end when the rate of unemployment in the United States declines to 5.5 per cent of the labour force. That may not happen for many quarters.

On the other hand Larry Summers, the other important economic policymaker in the Obama White House, and US Treasury Secretary Timothy Geithner prefer the conventional interpretation.They believe that the aim of the policymakers should now be to manage the recovery, determining the time when the governments should begin the process of reducing the amount of stimulation used to prevent the economies from going through a free fall.

President Obama’s challenge is to balance three different types of advice he is receiving from the people who work in the White House. The most vocal are those who watch politics, among them Rahm Emannuel, his chief of staff, and David Axelrod, his senior advisor. Both are worried that given the sharp increase in the levels of public debt and associated fiscal deficits it would be politically costly – perhaps suicidal – to continue to stimulate the economy by using the printing press.

Already, the “tea party” movement has gained a great deal of political ground. It has developed its campaign by suggesting that the mountain of debt the United States has built up will have a severe impact on the future generations as they begin to pay off the accumulated debt through higher taxes and reduced consumption.

Summers and Geithner are the sources of the second line of advice to the president.They are not averse to continuing with some stimulation and providing compensation to the millions of people who remain unemployed – both positions are unpopular with the Republicans – but to focus attention on reforming the financial system through better regulation.

According to them the president needs to spend his political capital on bringing about structural changes in the economy so that the economy does not go through another spin as it did in 2008-09.

The third advice comes from people such as Romer who fear that by exiting more rapidly than the current situation warrants the economy may head towards a double dip recession rather than continued recovery. This group has the support of some private economists with powerful credentials. The most prominent among these is Paul Krugman, a Nobel Prize winning Princeton professor and a columnist at The New York Times.

“Many economists, myself included, regard this turn to austerity as a huge mistake’, he wrote in a recent article. “It raises memories of 1937, when F. D.R’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And in Germany, a few scholars see parallels to the policies of Heinrich Bruning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.” While both the EU and the United States are projected to see growth of only one per cent in their respective GDPs, the Asian countries are expected to do much better. Led by China, Asia is becoming the engine of global growth and may save the world economy from plunging into a double-dip recession. Asia’s help is coming in many ways.

Recent German data illustrates the deep structural changes that are taking place in the global economy would not have been possible without economic expansion in Asia.

Since May last year when continental Europe was in the midst of the worst economic downturn in the post-war period, German exports have risen 28.8 per cent. Sales to nonEuropean markets buoyed the trend; they increased by 39.5 per cent. “Without China we would have hardly seen this recovery” said Hannes Hesse, managing director of the VDMA engineering associates.

According to Deither Klingelnberg, a maker of machine tools, Asian and emerging markets demand is the main driving force for the ongoing recovery of the German manufacturing and exports.

“It’s China, China, China by a long way, then India, Brazil, then Russia – and the US remains weak as do many of our European markets”, he said. While China may begin to slow down the unsustainably high rate of growth of recent months, it will remain close to 10 per cent. Some other large Asian economies may step forward. For instance, there is a lot of life in Indonesia which could begin to spend more by relying not just on taxes but also on borrowing.

Emerging Asia as whole, with a quarter of the world’s gross domestic product, has less than eight per cent of its outstanding bonds. Increasing the ratio will help not only to increase domestic demand, it could also put a floor under which the global economy would not fall.

Asia then has become the economic area that will begin to carry a great deal of water for the global economy. But for that to happen, the West must not turn totally away from expansion and move towards austerity. To use another metaphor Asia is developing broad shoulders but they can carry only so much burden for the moment.

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


[B]By Shahid Javed Burki
Tuesday, 20 Jul, 2010[/B]


BEFORE gaining independence in 1947, what was to become Pakistan was part of the larger economy of British India. This ceased to be the case over a two-year period following independence. The main reason for this was a series of hostile moves by New Delhi to cripple Pakistan economically.

The intention probably was that the men who had led the fight for the creation of a separate homeland for the Muslim community would realise the folly of their actions and seek re-entry into the Union. India would thus become whole once again. That did not happen and Pakistan survived economically through a combination of sacrifice and some luck — the Korean War produced a boom in the prices of several commodities in which Pakistan had large tradable surpluses.

Jute produced entirely in East Pakistan came to be called the ‘golden fibre’ and earned huge amounts of foreign exchange. Cotton, leather and wool — mostly the products of West Pakistan — also did well. The earnings from the exports of these commodities were able to pay for the first industrialisation effort Pakistan launched in order to develop an economy that was not dependent on that of India.

With economic links between independent India and Pakistan severed, Pakistan went looking for partners in development. The first choice was the US which had its own strategic interests in the area of which Pakistan was an important part. After the signing of a defence agreement in 1954 Pakistan became a large recipient of American military and economic aid. This relationship lasted for a decade, from the mid ’50s to the mid ’60s. The India-Pakistan war of 1965 resulted in a pullback by the United States.

Pakistan responded by developing close relations with China, a country that was isolated from the rest of the world partly because of the ideology it was pursuing but also because of the US effort to contain the communist state. China-Pakistan ties withstood changes in Pakistani regimes as well as a major ideological change in China.

The leaders of both countries have identified their relations as an all-weather friendship. This was reaffirmed by both sides during the recently concluded visit by President Asif Ali Zardari to Beijing and Shanghai. It was the fifth visit by the Pakistani president to China, the subject of this column last week.

In between the approaches to America and China, Pakistan also developed close relations with the Middle East. This was based on a number of considerations, among them the Middle East’s need for workers which Pakistan could supply and Pakistan’s need for external capital flows which was partly provided by the oil-exporting countries in the region. But there was a negative side to this relationship as well. It exposed Pakistan to a highly conservative interpretation of Islam which was to have profound consequences for the country’s social development.

Saudi Arabia, at the urging of the US, paid for the establishment of Islamic seminaries located in the border area between Afghanistan and Pakistan. They taught not only Islam to the young who lived in the refugee camps that housed more than 3.5 million Afghan refugees, they also taught ‘jihad’ and trained them to fight the Soviets in Afghanistan. Thus were laid the foundations for the rise of the Taliban.

Pakistan is now at a point at which it needs to define its external relations in terms of its economic and development needs rather than in terms of promoting Islamic ideology or becoming part of a new Great Game. This is being played out as the large economies in the world reposition themselves to accommodate the rise of China and the impressive increases in the rate of growth of that country’s economy.

While I have been urging the need to develop close economic relations with India I am cognisant of the fact that India is not an easy country to love. This is not only Pakistan’s experience. It is also the experience of other countries in India’s immediate neighbourhood. This places Pakistan in a similar position as Turkey that has been seeking close relations with the European Union only to be repeatedly rebuffed. Perhaps Turkey and Pakistan could work together to create another economic region focused on the development of the Central Asian region with which both have strong historical ties.

Turkey’s recent economic rise has surprised most observers of the country. According to Landon Thomas Jr of the International Herald Tribune, “today Turkey is a fast-rising economic power, with a core of competitive companies turning the youthful nation into an entrepreneurial hub, tapping the cash-rich export markets in Russia and the Middle East and attracting billions of dollars in return”.

Turkey has recently reported a stunning 11.4 per cent economic expansion in the first quarter of 2010, second only to that of China and better than that of India. The European Union is not likely to grow at a rate of more than one per cent in 2010.

Turkey’s performance is astounding given that just 10 years ago it had a budget deficit of 16 per cent of GDP and an inflation rate of 72 per cent. The great irony is that Turkey will meet the criteria set by the Europeans to enter the Union more fully than some of its present members. Its debt to GDP ratio is only 49 per cent and it could well get its budget deficit below three per cent by next year. Judging by the spreads on credit-default swaps, Turkey at 192 is way ahead of Greece at 980 and marginally better than Italy at 194.

The new generation of Turkish entrepreneurs has left the aggressive European type of secularism espoused by Kemal Ataturk, the founder of modern Turkey. Most of them now at the forefront of the Turkish economy are practising Muslims and have no qualms about their faith. They are also the followers of Prime Minister Recep Tayyip Erdogan who has been successful in combining social conservatism with sound economic management. His Justice Development Party is now the most dominant political movement since the early days of the republic.

In other words, Turkey is pointing the way Pakistan could go. It could partner the country and create a bloc of non-Arab Muslim states that could also accommodate Afghanistan as the US engagement in that country begins the phase-out period.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Get ready for an urban revolution[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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


ONE of the most important changes in economic landscape is under way. Unfortunately, neither the government nor the private sector is ready to deal with it.

In the next one decade 50 per cent of the Pakistani population – perhaps an even greater proportion – will reside in cities of many sizes and shapes. By that time the population will have grown to 230 million. This means that 115 million people will live in towns and cities. These people will need goods and services the economy does not produce in adequate quantities at this time.

The gap will increase unless the government – and within the government the Planning Commission – takes a careful stock of the emerging situation and does adequate planning for the future.

The McKinsey Global Institute has, over the years, studied urban development patterns in the developing world and identified how governments can and should deal with them. The latest report to be published by it pertains to India.

In India’s urban awakening: Building Inclusive Cities, Sustaining Economic Growth issued in April of this year, the institute paints a grim picture of what is coming to that country. “Even today, India’s cities are failing to provide a basic standard of living for their residents. But life could become much tougher as cities expand”, write the authors of the report. “Demand for every key service will increase five to seven times in cities of every size and type.” Among the many shortfalls that have to be provided for, McKinsey pays special attention to housing and infrastructure. Indian cities will need to add 700-900 million square meters of residential space in order to cope with the expected demand. This is equivalent to adding a Chicago every year. As much as $1.2 trillion worth of investment is needed to close the current supply-demand gap and cover the expected demand for the future.

Reduce these numbers by about a tenth and you have a picture for Pakistan. However, there is no equivalent base of information available in Pakistan on which the government and the private sector needs to act. Why so much emphasis on the private sector? There are many reasons for this of which two are particularly important. The government is short of resources needed to meet the current and coming demand. The extreme shortage in the availability of electric power is an example of both lack of public resources to supply what is needed as well as the absence of long-term planning.

The second reason is that the coming rate of urbanisation will increase the demand for goods and services only the private sector can provide. There is money to be made by those who begin to invest now for meeting future demand. This means that the private sector needs to reorient its production to meet the needs of the people living in towns and cities.

The United Nations Population Division has estimated the pattern of growth of Pakistan’s urban population over the next couple of decades. It sees the urban population more than doubling between 2000 when it was estimated at 48 million to more than 104 million in 2025. At the start of this century a bit more than 33 per cent of the population lived in the country’s towns and cities. That proportion will increase to over 46 per cent in 2025.

There will be a steady decline in the rate of growth of rural population. The rate is likely to decrease from 1.3 per cent in 2005-10 to only 0.28 per cent in 2020-25. In 2025-30, the number of people residing in the countryside will actually decline.This means that the number of people migrating from the rural to urban areas will outnumber the natural increase in rural population.

There will be some change in the distribution of urban population among cities of different sizes. Karachi will remain the largest city with its population increasing from an estimated 13 million in 2010 to 19 million by 2025. By then Lahore will join Karachi as a mega-city defined as those with populations of more than 10 million people. Lahore’s population will increase from seven million in 2010 to 10.5 million in 2025.

However there will be a slight decline in the proportion of these two cities in the total urban population. It will decrease from 32.3 in 2000 to 28.5 per cent in 2025. This is in keeping with the trend the United Nations believes will be followed all over the developing world.The earlier belief that a few mega-cities will dominate the urban landscape has been abandoned in favour of the suggestion that secondary cities – those with populations of one to five million – will become the dominant form of urban presence in the emerging world.

The McKinsey report on India finds that that will indeed be the case for that country. However, the projections by the United Nations don’t see that trend for Pakistan. In Pakistan, the share of smaller cities in the range of 0.5 to 1.0 million more than doubles in the quarter century between 2000 and 2025 increasing from three to seven per cent. The number of cities in this category will increase from only two to eleven during this period.

Demographers and development economists recognise five dimensions of a policy aimed at urban management – funding, governance, overall planning, sectoral planning, and urban shape.The resource constraint the country faces is well recognised. The government’s approach to overcome this is to go hat-in-hand to groups such as the Friends of Democratic Pakistan that held yet another meeting in Islamabad on July 17 to which Islamabad presented its energy policy and asked the “friends” to finance it. This approach is not viable over the longrun.

The friends are prepared to turn up at these meetings since Pakistan today is regarded as the epicentre of global of terrorism. They have concluded that one important step to deal with this situation is to stabilise Pakistan and develop its economy.

That way the vast armies of youth produced by an unrelenting increase in population will get occupied with the economy. But for a long-term approach to one aspect of the country’s demographics is not to postpone the important task of finding a solution that depends on domestic structures rather than on foreign help.

This will require both policy and structural change to raise resources internally for building urban Pakistan. What the planners must be committed to is not preparing another strategy for financing by the Friends of Pakistan.

What is needed is a viable urban policy.The first step in that direction is to hold a population census which was due in 2008 if the ten-year rule for the time between two censuses were to be observed or in 2010 if Pakistan were to be brought in line with other countries. And with the census should come a household survey that will tell us how much people earn and spend and what are the various categories of expenditure.

This information is required in order for the government to provide services to the people living in urban areas and for the private sector to produce goods and commodities for their.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Our India predicament[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER] One way of dealing with the Indian conundrum is to change the basis of the dialogue. It is high time that we put history on the back burner and let economics take centre stage. [/CENTER][/I][/B]

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


A NUMBER of stories in the Dawn issue of July 17 provide an interesting insight into the state of play in India-Pakistan relations. Two stories on discussions between the foreign ministers of the two countries suggest that Pakistan’s expectation of progress, following the statement issued at Thimpu that played host to the Saarc summit earlier this year was not realised.
Instead of taking two steps forward and perhaps one backward, that is frequently the case in a dialogue between two parties with a long history of animosity, the Islamabad talks only served to push back the relationship. The opti mists saw some hope in the declaration that Pakistani Foreign Minister Shah Mehmood Qureshi had accepted the invitation issued by his counterpart to visit New Delhi at some future date. That was practically laid to rest by the Pakistani foreign minister’s meeting with the press a day after he concluded the discussions with the Indians.

The foreign minister indicated with a palpable show of irritation that he would not go to India unless there was indication that Pakistan’s neighbour was prepared to discuss the substantive issues that remain to be resolved. His assertion that the Indian foreign minister had arrived in Islamabad with a highly restricted mandate from which telephone calls from New Delhi, while the meeting was in progress, ensured he did not depart caused considerable displeasure in India. There is now considerable bad blood between the two sides. This is where the United States enters the picture.

Another Dawn story provided some background to Pakistan’s preparation for the second round of the strategic dialogue between Islamabad and Washington begun a few months ago in the American capital. It was revealed that the Pakistani side planned to focus on two issues in their talks with their counterparts from Washington. They wanted the Americans to pressure India not to compromise Pakistan’s situation with respect to the availability of water.

A World Bank study issued a couple of years ago had suggested that Pakistan was fast approaching the situation in which countries are classified as ‘waterstressed’. This threshold is placed at 1,000 cubic metres per head of the population. Availability in Pakistan has already declined to 1,500 from as much as 5,000 cubic metres in the early 1950s.

Increase in the size of the population is only one reason that this decline has occurred. Pakistanis believe that some actions by India in the upper reaches of the rivers that were allotted to the country by the treaty signed in 1960 is also a cause. Stopping India from pursuing that line was regarded as sufficiently important for Islamabad to seek American help but Secretary of State Hillary Clinton in her two-day trip to Islamabad recently refused to allow America to get involved.

Another story was about the discovery of a large gas field in Kohat which would, when developed, deal with energy shortages that Pakistan has to contend with — this one pertaining to the availability of natural gas, a fuel on which Pakistan is heavily dependent for meeting its growing energy needs. At the second session of the Pakistan-US strategic dialogue and also at the Friends of Pakistan meeting that preceded it, Pakistan asked for help in developing the energy sector.

Putting together these stories creates a picture that Pakistan should observe carefully in order to tackle a difficult diplomatic and economic situation. India is able to adopt what Pakistan sees as a hard line in its relations with its neighbour in part because of its economic strength. For the last quarter century the Indian economic growth has been twice that of Pakistan’s. When we factor in Pakistan’s higher rate of population increase, the income gap between the two countries has widened considerably.

In the mid-1980s when India began to reform its economy, per capita income in Pakistan was higher than that of its neighbour. Now the Indian income is 20 per cent greater. Pakistan is dependent on the largesse of its foreign friends to keep its economy from falling into a deep abyss. It is appealing to the Americans and the Chinese for greater help than the two countries are prepared to provide. India, on the other hand, with $250bn of accumulated foreign exchange reserves — the fifth highest in the world — is in a very comfortable position. Given these economic disparities it is not surprising that the Indians are reading from a script that calls for a hard line towards what it views as a troublesome neighbour.

This was not always the case. There was a time when Pakistan was held out as the model of development which other countries could follow. It had man aged to build a strong economy by having the public and private sectors work for the common good. India, on the other hand, by putting the state on the commanding heights of the economy, was managing to grow at what its own economists called the Hindu rate of GDP increase.

There are no permanent trends in the way countries move forward; Pakistan should be able to reverse the trend. It needs to do that in order to be treated with some respect by the international community, in particular its neighbours.

I have suggested in this space before that one way of dealing with the Indian conundrum is to change the basis of the dialogue. It might be time to put history on the back burner and let economics take centre stage. Some problems are too intractable to be resolved through dialogue.

The best way to deal with them is to change the circumstances that surround them. That is exactly what the Chinese did regarding their claim over Taiwan. Once a senior Chinese leader told me that time was on their side. He was not measuring time in months or years but decades. In the meantime they were going to change the nature of the relationship with the island, to have it develop a strong economic vested interest in the mainland. We could try the same approach with India.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]New economics of systemic risk[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, August 02, 2010[/B]

THE development of economics as a discipline has moved a long way since the time of Adam Smith, widely regarded as the founder of modern economics. Much of what the Scotsman said two centuries ago in The Wealth of Nations, generally regarded as the bible of the discipline, was based on reflection and intuition.
Smith neither came up with mathematical equations to lend credence to his observations nor did he scientifically gather information to prove that he was on the right track. That was left to later economists such as Alfred Marshall and Paul Samuelson.

Intuition is no longer the source of many new developments. Many of the new insights in economics are based on empirical work. In development economics, most of what we have come to believe is based on the econometric analysis of the data gathered by such institutions as the World Bank, the Asian Development Bank and the International Monetary Fund.

Many of the more important advances in economics have come during and after major crises. It was after the Great Depression that John Maynard Keynes, generally considered to be the greatest twentieth century economist, came to lay the foundations of what came to be known as macroeconomics. His main contribution was to suggest that markets were not totally rational in the way they behaved. They did not automatically adjust to the changes brought about by such external events as new inventions and natural or man-made disasters.

Economies thus disturbed needed the intervention of governments, using their ability to tax and spend as well as the ability to create money. Thus was born what the Nobel Laureate Paul Krugman calls, “depression economics.” The new crisis that produced the Great Recession of 2008-09, is also leading to new developments in the discipline of economics. In studying how to respond to the upheaval that has occurred and create a more stable system, financial officials, central bankers, international experts and academics have been focusing on a concept known as “systemic risk”.

This manifested itself in “falling domino” problem that led mortgage defaults and in the United States to lock up the global financial system because of the complex connections among banks, investment companies, insurers and other firms around the world. The phenomenon is not well understood in spite of all the work that has been done in recent months.

“We sort of know vaguely what systemic risk is and what factors might relate to it. But to argue that is a well understood science at this point is overstating the fact,” says Raghuram Rajan, former Chief Economist of the IMF and the author of a highly influential book, Fault Lines, which explored the role of the United States’ real estate and credit bubbles in the crisis that peaked in 2008-09 but is still not fully over.

It was Rajan – along with some other contrarian economists – who first suggested that the United States was heading towards an economic disaster. This was done in a paper delivered in the summer of 2005 at Jackson Hole where central bankers from around the world and economists working in the field of monetary economics gather every year to reflect on the current economic situation.

Ragan challenged the Efficient Market Hypothesis that had begun to dominate academic thinking as well as the working of the institutions such as the Federal Reserve Bank and the US central bank. Under the leadership of Alan Greenspan the Fed believed that the markets were better left to their own devices to the point of self-regulation.

Before the crisis there was a widespread belief that the prices charged by the market for various kinds of assets reflected the information available to those who buy and sell. Markets with large numbers of people with enough information and the ability to move money freely could assess the risks of different types of investments and protect themselves. That, of course, did not happen.

Watching the herd instinct that developed many economists abandoned the “rationality” principle and began to look at the way consumers and investors behave. Thus was born “behavioural economics” which has begun to invite considerable amount of attention. Its most notable practitioner is Robert Shiller, the economist from Yale University.

What is the relevance of all these ongoing developments for a country such as Pakistan? The answer to this question should perhaps begin with a bit of history. In early 2006, at a seminar organised by the Washington-based Woodrow Wilson institution, I incurred the displeasure of Shaukat Aziz, the then prime minister, by suggesting that his policies had allowed Pakistan to become a “casino economics”. My observation was based on what I had observed was happening in the real estate market. There was an enormous amount of speculative behaviour in the market as investors bought and sold what were called the “files”.

These were claims to yet-to-developed plots of land in housing communities that were being built in most of the important cities around the country. Some of the files that were bought and sold did not even identify the location of the plots. The purchases of the plots created an enormous real estate bubble which, like all bubbles, was bound to burst.

Like all bubbles this one was also based on the availability of easy money. This had become available for three reasons: lowering of lending rates by the State Bank of Pakistan, tons of black money created by corruption and taxdodging by the rich, and loads of finance that was coming in from abroad as remittances being sent by the people of Pakistani origin living and working abroad.

It was not unusual for the price paid for some of the files to double or triple in a matter of months. It was legitimate for me to call this “casino economics” since the real estate bubble began to affect all parts of the Pakistani economic system.

The returns available in this type on investment could not be replicated in other parts of the economy. Accordingly a great deal of money was sucked into the real estate sector depriving more important parts of the economy with the finance they needed. Had the administration then paid attention to the casino economy that had begun to dominate the Pakistani system, some ameliorative actions could have been taken. Tightening of money supply and heavy taxes on real estate transactions were two of the several measures that would have stopped the bubble from developing and spreading.

Taxes could have been specifically directed to curb speculative behaviour. For instance, a transaction tax could have been levied if the period between the purchase and sale of a “file” was very short, say less than a year.Transactions of files could have been discouraged by mandating that the properties they represented had to be clearly specified. None of this, of course, was done and the real estate market came crashing down. It has still to recover.

The lesson to be drawn by the policymakers from the experiences of various economies round the globe and their own experience with the collapse of the real estate market is that they should always be mindful of developments that cannot be justified on the basis of rational expectation.They must step in with appropriate policies to puncture the developing balloons.

Left to inflate they will do a lot of damage not only to the sectors that were directly involved but also to those that were somehow linked with them. Once their work is done those working on systemic risks will have a great deal to teach the policymaker including those in Pakistan.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Will the war be affected?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B][U][CENTER]The documents released to the press were not authenticated by those who were in the know or corroborated by independent reviewers. So, they cannot be relied upon as the true story of the war.[/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 03 August, 2010[/B]

A FAIR amount of water has already flowed under the bridge since an organisation calling it self Wikileaks made available tens of thousands of documents to three left-leaning newspapers in Europe and the United States. These pertain to the ongoing war in Afghanistan.
Much has already been written and said about the significance of the leaks for the conduct of the war in Afghanistan. The Pakistani press and TV commentators have rightly focused on the impact the release of these docu ments might have on the American pub lic perception of Pakistan and US Pakistan relations. These had been im proving as a result of strenuous efforts made in the last one year by the capitals of the two countries. The momentum will be hard to maintain especially in the more impressionable US Congress.

Hussain Haqqani, Pakistan’s ambassa dor to the US, demonstrated the right take on the leaks. In many appearances on television news shows and radio talk shows the ambassador emphasised that most of the documents were ‘situational’ reports filed by thousands of people who were observing what was happening in the field. He likened them to ‘911 calls’ so called in the United States since that is the telephone number used by people in distress to report to the authorities when they need assistance.

The documents released to the press were not authenticated by those who were in the know or corroborated by independent reviewers. In other words they cannot be relied upon as the true story of the war. There was a great deal of logic in the ambassador’s argument but the intention of Julian Assange, the man behind the leaks, was not to write an unvarnished history of the war while it was still in progress. His purpose was to change American public opinion about the war and reduce the amount of support it was receiving.

The period covered mostly by the papers was 2004-07 before President Barack Obama became president. What was reported in the documents, therefore, was the chaos and confusion that existed during the time of President George W. Bush. The mission Wikileaks had adopted was to persuade President Obama that little political purpose would be served by carrying on his shoulders the burden that was left behind by his predecessor. In that respect it was wrong to put these leaks in the same league as the Pentagon Papers that changed the course of the American war effort in Vietnam and in doing so shook the country’s political establishment.

But the Pentagon Papers were not raw documents as is the case with the Wikileaks exposé. They were the official history of the events leading up to the Vietnam war and the war itself prepared by the Pentagon under the title of United States-Vietnam Relations, 1945 67; A Study Prepared by the Department of Defence.It was a top secret study conducted by the US Department of Defence of the American involvement in Vietnam from 1945, the year the Second World War ended, to 1967 when the war in Vietnam was entering a decisive phase. The study was commissioned by Secretary of Defence Robert S. McNamara in 1967 and completed in 1968. Daniel Ellsberg was one of the contributors to the study and the man who leaked it to the press. The study in draft form was turned over to The New York Times which began publishing excerpts from it in a series of articles that started appearing from June 13, 1971. By that time President Johnson, having decided not to stand for office, had been succeeded by President Richard Nixon and McNamara was already at the World Bank as that institution’s president.

The publication of the Pentagon Papers led to political controversy, lawsuits and the extended trial of Ellsberg. In an article published in 1996 to commemorate the 25th anniversary of the publication of the Pentagon document, The New York Times wrote that the Pentagon study “demonstrated, among other things, that the Johnson administration has systematically lied to the public but also to Congress about a subject of transcendental national interest and significance”.

To determine whether this leak will have the equivalent effect on the Afghan war as the Pentagon Papers did on the war in Vietnam we should first look at the story behind the leaks.

Last month, The New York Times committed five pages worth of space to report on the content of the 91,000 reports leaked to it and two other newspapers pertaining to the current war in Afghanistan. The two other newspapers were Britain’s The Guardian and Germany’s Der Spiegel. The timing of the stories was the result of an agreement with the Germany-based Wikileaks.org that had painstakingly gathered the material. The organisation provided the documents to the three papers on the condition that the stories based on them be published on the same day it was plan ning to post them on its website.

Each paper did its own analysis of what the documents showed, what impact their release might have on the conduct of the war, what would be the consequence of their release on relations between the US and Pakistan, how would they affect relations between Afghanistan and Pakistan. There will be consequences on all these fronts but the main purpose is not to achieve any of these ends. The purpose, as clearly indicated by the Wikileaks founder, is to provide a way out for the Obama administration to reduce the scope of its mission in Afghanistan and to head for the exit door.

It was natural for commentators in Pakistan to dwell on the references made to their country, or the role attributed to the ISI in the Afghan affair, or to what retired Lt Gen Hamid Gul was doing and saying with respect to the war in Afghanistan. To use military parlance the blow to Pakistan’s reputation as a partner the United States could trust is simply collateral damage inflicted by this episode. We should not get terribly concerned.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]How is the economy shaping up?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 09 Aug, 2010[/B]

WE should get ready for another poor year for the economy in terms of the rate of growth in national product, pace of job creation, and interpersonal and inter-regional income distribution. The government’s prediction that the GDP in 2010-11 would increase by 4.1 per cent now seems extremely optimistic.

Given some of the shocks the economy has received in the last few days, it appears that the national product will not increase by more than 2.5 to 2.8 per cent this year This will be about the same as the revised rate of growth in 2009-10.

If that came about, Pakistan’s current economic expansion will be less than one half that of Bangladesh and one third that of India. Pakistan today is South Asia’s sickest economy and will remain that way unless the policymakers move decisively. They have taken some important decisions recently but I believe they were not the right ones. I will come to this discussion at the conclusion of the article.

There are several reasons for being so pessimistic. The first is the damage inflicted by the floods in the last few days. By the time this appears in print, the number of people killed by the floods will have probably exceeded 2,000 and the worst is perhaps still to come as flood waters flow down the rivers and into the more densely populated parts of the country. The areas already affected in the country’s northwest have suffered enormously.

This is the worst flood in this part of the country in the last 80 years. The areas that have been hit were already suffering because of the war against terrorism that brought the military into the Malakand division. The number of people displaced by that conflict exceeded two million. The same people are on the move again. Most of those who have hit the road have no houses to go back to, no jobs to which they can return, and nothing to look forward to in the future.

The military has moved back in once again, this time to provide relief and from the accounts I have seen in the western press that has journalists in the area it is doing a credible job. But a larger effort will be needed to bring life back to these areas and that will need both resources and organisation, neither of which is available at the provincial and central levels.

There will be further damage as water reaches the lower parts of the Punjab and both the upper and lower parts of Sindh. Unless action is taken immediately there will be further loss of life; destruction of agriculture, irrigation, and communication infrastructure; and further loss of confidence in the government’s ability and effectiveness in delivering basic goods and services to the people.

How much all of this will cost the economy in terms of rate of growth? At this point only rough guesses can be made but I would be surprised if the rate of growth of GDP is not reduced by one percentage point. This alone will bring down the rate of GDP increase to not much more than three per cent in 2010-11.

To this lowering of the estimate we should add some other negative developments. One of them is what The New York Times recently described as “aid fatigue” in the case of Pakistan. The mush hyped Friends of Democratic Pakistan has pledged large sums of money but delivered only a small fraction of the promised amounts. The pledges were factored into growth projections by the government. Only the United States has moved some distance in implementing its aid programme.

During the recent visit of Secretary of State Hillary Clinton, projects were identified that will require $500 million of external assistance. This will be provided by the United States. During President Asif Ali Zardari’s most recent visit to Beijing – his fifth since taking office – the Chinese also promised assistance for a number of projects in the communication and energy sectors.

Development of both sectors is vital for the Pakistani economy and will lay the basis for future growth. Project assistance will also come from Japan and the multilateral development banks. However, the recent standoff with Britain on the issue of the unfortunate comments made by that country’s new prime minister, we can expect a slowing down in the large aid effort that was made in the past by DFID, the UK aid agency.

However, all these – and several other moves – will materialise over the medium and long-term. But Pakistan’s needs are immediate and here the country’s prospects don’t look very good. The multilaterals are not happy with Pakistan’s policy performance. The IMF will want more to be done on the fiscal mobilisation front before it gets ready to lend again from its augmented resources.

Dr Hafiz Sheikh, the new finance minister, will argue the country’s case in late August during a visit to Washington. But the Fund will be looking for some concrete achievements in terms of the tax mobilisation effort. There, as is well known, he has run into political difficulties including the resistance by the two largest provinces, Sindh and the Punjab.

The fast moving developments in Afghanistan and the rapid loss of interest on the part of the United States in committing itself to a long stay in that country will have major economic and security consequences for Pakistan. The release of tens of thousands documents by WikiLeaks has further sullied Pakistan reputation in the West and cast a deep shadow on the country’s relations with the UK.

Rapid withdrawal by the United States from Afghanistan – an outcome that is now very much on the cards – will seriously affect Pakistan’s situation. It will certainly reduce the willingness of western companies to invest in the country. Even the Pakistanis residing abroad are becoming cautious; they will be less eager to invest in the homeland, waiting for the investment climate to improve.

It is the investment climate improvement that is by far the most important task before the government and it is here that a great deal of effort needs to be put in. This is where I have some doubts about the wisdom shown by the State Bank of Pakistan in tightening money supply by raising its rate by 50 basis points.

The central bank is rightly concerned about rising inflation but, as John Maynard Keynes emphasised decades ago, an economic slowdown is not the time when monetary authorities should try to control aggregate demand by making money more expensive.

There is a raging debate on this issue in the world with the Keynesians calling for additional stimulation of the economy and postponing for a while the exit from easy money policies that have marked the policy response by most governments across the globe. The conservatives, on the other hand, are asking for greater attention to be given to the need for reducing the burden of debt.

The monetary authorities in Pakistan have opted for the conservative course. China and India have also begun to tighten money supply in their countries but the situation there is very different from the one prevailing in Pakistan. Both the Chinese and the Indian economies are moving forward at a rapid clip; in Pakistan the economy is still very sluggish. This is certainly not the time to tighten the supply of money.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Change in Afghan focus[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 10 Aug, 2010[/B]

AS Washington edges towards the tipping point — the start of the pull-out of American troops from Afghanistan in July 2011 — the debate in the US has perked up on a number of issues.

The issue became intense after a little-known organisation called WikiLeaks.com presented the world with tens of thousands of documents providing details about various aspects of the Afghan war.

From Pakistan’s perspective, the most damaging information was the claim on the part of several people who had written the dispatches included in the leaks that the country was playing a double game. While supporting America’s fight against the Taliban, it was said to be in deep conversation with sections of the insurgents about tactics and strategy.

In the light of this development a number of questions are being asked. Several of these are worth discussing in order to understand what lies ahead for Pakistan. Is the current American war effort in Afghanistan now Barack Obama’s or is it a continuation of what his predecessor, George W. Bush, started right after 9/11? It was suggested by Michael Steele, chairman of the Republican National Committee, that what is now going on in Afghanistan is Obama’s war, very different from what Bush began almost nine years ago. How is Obama’s effort different from that of Bush’s?

The new president is clearly more interested in nation-building in Afghanistan than his predecessor. This includes strengthening the government in Kabul, creating credible military and police forces that can be deployed, and putting in place development programmes aimed at improving the lives of people. Is America winning or losing the war? Michael Steele suggested that the going was not good for the US and there was no sign that after the expenditure of so much treasure and spilling of so much blood, America had gained anything in Afghanistan. Steele was roundly criticised for making these assertions, most notably by his Republican colleagues.

In view of this debate and the uncertainty it has created about America’s purpose in Afghanistan, in which direction is President Obama likely to go? And which of the several ways he could choose would suit Pakistan’s strategic purpose? Let us take the first question first. Obama has ordered another review of his options to be completed by December 2010. This will be the third review. The first was undertaken soon after Obama took office and led to a change in command of the American troops — Gen Stanley McChrystal was brought in to replace a less activist and more cautious commander — and the deployment of another 17,000 troops, augmenting the 30,000 that were already in place. The reading at that time was that the Taliban were gaining ground and the momentum they were building up needed to be broken.

The second, the more intensive review, was carried out in the three-month period from September to November 2009. It resulted in Obama telling the world that he was sending another 30,000 American troops to Afghanistan. He was requesting Nato countries to dispatch 10,000 soldiers which would bring the total of US-allied troops to 100,000. On both occasions it was clear that the young president had come under the pressure of the senior army commanders. This increase in the presence of foreign troops was to achieve two results. It would check the advance the Taliban continued to make. It would also ensure that Al Qaeda would not find a haven in Afghanistan, moving in from Pakistan where it had allegedly sought refuge after the 9/11 attacks.

Obama would have wanted to wait until the end of 2010 before deciding the further course of action. He was, however, presented with a situation he could not have foreseen: grave indiscretion on the part Gen McChrystal in which he showed a total lack of confidence in his civilian bosses. The moment Rolling Stone published an article based on several interviews with the general and his colleagues, it was clear that he could not keep his job. It is generally recognised that Obama played his hand well by immediately firing the general and appointing the highly acclaimed Gen David Petraeus in his place. These moves led to the start of the debate on America’s strategy in Afghanistan.

It is believed that before taking the job Petraeus must have received the go-ahead to pursue what has come to be called the counter-insurgency strategy he had authored in a widely read document and then applied it to Iraq. It appears to have succeeded in that country. COIN, as the strategy is often referred to, has two aspects. It uses military force to free a particular area of insurgents and then brings in good governance to provide the citizenry the goods and services it needs. This strategy was put to test in the town of Marjah in the troubled province of Helmand. The military was successful in quickly clearing the area of insurgents but the government failed to move in with a credible programme to provide what the people wanted. The man appointed to govern the city had a chequered history and had served time in a prison in Germany. He and his associates could not possibly win the confidence of the people. The Taliban came back.

It was the experience in Marjah that led Gen McChrystal to postpone the promised operation in Kandahar, a much larger city, where COIN was to be put to a real test. McChrystal’s dismissal and his replacement by Petraeus changed the entire American approach. It was in this environment of uncertainty that WikiLeaks provided the world with a detailed account of the war in Afghanistan.

From Pakistan’s view a quick pull-out by America would create a series of problems with which the country cannot cope. It would strengthen the Taliban and make it possible for them to begin to influence developments in Pakistan’s border areas. From there they will begin to reach out to other areas in Pakistan.

Shahid Javed Burki article
 

[COLOR="DarkRed"][SIZE="5"][CENTER][FONT="Georgia"][B][B][B][B][B]Focus on inequalities[/B][/B][/B][/B][/B][/FONT][/CENTER][/SIZE][/COLOR]

[COLOR="Blue"][SIZE="2"][FONT="Georgia"][FONT="Fixedsys"][B]By Shahid Javed Burki
Tuesday, 17 Aug, 2010[/B][/FONT][/FONT][/SIZE][/COLOR]

IT is only recently that economists have begun to concern themselves with inequality. For decades development economists devoted their energies to understanding how economies grow.

Later in the early 1970s poverty became a concern and many academics working in the field of development began to appreciate that something more than growth was needed to better the lives of the citizens who were poor. This led to the concern with the ‘bottom 40 per cent’ of the population.

Several analysts concluded that the state had to intervene directly to lift this segment of the population out of poverty. But the phenomenon of inequality remained understudied and, therefore, did not become the subject of state action.

For several years before economists became interested in the subject, political scientists had come to the conclusion that inequality matters and that it can influence the way various segments of society behave towards one another and their rulers.

In a celebrated work published more than four decades ago, Harvard University’s Samuel P. Huntington studied the impact of economic growth on political development. Although he came to be better known for his later work on the clash of civilisations, the work on political backwardness in societies going through rapid economic change was much more profound.

Huntington’s work received support from Albert O. Hirschman, another Harvard professor, who in his book Exit, Voice and Loyalty speculated on how people behave when they become very unhappy with their environment. If the attachment with the rulers is very strong, they remain loyal; if there are institutions that can help register discontent, they give voice to their grievances; if there are no such institutions as is the case in weak political systems, they may exit and find some other way of expressing their unhappiness.

Huntington knew Pakistan well and had studied the changes the country went through during the period President Ayub Khan was in power. According to him in countries with similar experiences, policymakers had to worry about what he called “relative deprivation”. This will not show up in measures economists normally use to analyse inequality but is important in terms of the impact on political development of rapid economic change.

Even if incomes had increased for all segments of the population, if they had risen at very different rates for some segments, the impact on politics could be severe. Although, Huntington’s work was published before Ayub Khan’s government was brought down by political agitation, what happened in Pakistan in 1968-69 in a way followed what he had anticipated in his seminal work.

For obvious reasons, democracies are more affected by people’s perception about various forms of inequality. India offers an interesting case study of a country where policymakers did not fully understand how people’s perception of their relative economic situation can affect politics. In 2004, the government led by the Bharatiya Janata Party (BJP) was confident that the excellent overall performance of the economy would help it to win another term. The election of that year was fought on the basis of a slogan — ‘shining India’ — that celebrated the high rates of growth of the Indian economy.

However, the BJP and its allies did not realise that several segments of the population were very unhappy that the benefits of rapid economic growth had not trickled down to them. This was especially the case with the millions who lived in the vast Indian countryside. They voted against the government and voted the Congress party back to power in New Delhi.

With Manmohan Singh as the prime minister, the new government went to work to deliver some benefits of growth to the country’s poor. An employment guarantee scheme was launched that ensured that if the economy failed to create enough jobs that could accommodate all those who were unemployed the state would step in and provide at least 100 days a year of temporary employment. This was an expensive programme but it delivered political results.

When the country went back to polls in 2009, it re-elected the Singh government. This was an unusual development in the sense that there was a history in India of voting out the incumbents. Not prepared to take chances, the Singh government forgave the loans small farmers had taken from various state-owned financial institutions. This was another way of keeping the poor in the countryside on the side of the government.

Something similar happened in Pakistan in the elections of 2008 when the political party that had supported Gen Musharraf did poorly compared to the parties that had opposed the military-led government. During four out of the almost nine years that Musharraf was in power the economy grew at a high rate but the bulk of the rewards went to a small segment of the population. Although firm estimates are not available there was a significant increase in inequality. As Huntington and Hirschman had predicted, the rulers paid a heavy political price for their indifference towards the political consequences of economic inequality.

The PPP-led government has been more mindful of having the poor benefit from the small amount of growth that has taken place since it took office in Islamabad a couple of years ago. The Benazir Income Support Programme has grown in size and is reported to be working well. However, there have been a number of missteps in handling the current crisis with almost 14 million people in the poorer parts of the country suffering enormously as a result of the unprecedented floods. It did not help the government’s image that the head of state chose to leave the country while millions of people were already affected.

Unless the government organises a credible relief and reconstruction effort it will pay a price at the next polls. What makes the problem even more acute for Pakistan is that the available alternative is in the form of extremists’ politics. Already some of the organisations associated with militant groups have shown greater agility in responding to the growing crisis than any of the parties that are in the various government coalitions.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]State, entrepreneurship and the common good[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 16 Aug, 2010[/B]

FOR about three decades, from the early 1980s to 2007 when the global economy almost collapsed, countries around the world have been busy redefining the role of the state with respect to economic development.
With the collapse of the Soviet Union and the end of Marxism, there was no longer a debate based on ideology. The argument that only the state could quicken the pace of development was no longer seriously made. The real debate was on how far the state should retreat and how much space should be left to the private sector to manage development and economic change on its own.

Among developed countries the United States took the lead by placing private entrepreneurship at the centre of its economy. As Alan Greenspan said repeatedly in his many pronouncements, private economic players could be trusted to be totally rational and when their actions are aggregated, the result would be combined good. That, of course, did not happen and the result was the Great Recession of 2008-09, brought about by personal greed and lack of concern for the common good.

In the emerging world Pakistan, under President Pervez Musharraf, gave an enormous amount of space to private entrepreneurs. The state left them alone, stepping in only when the private sector felt that it was faced with unfair competition from abroad. This allowed private monopolies to develop at the expense of the consumer.

Protected by the state, some sectors developed rapidly but not competitively. Automobile sector is an example which thrived behind the wall of protection that was built around it. This brings me to the question that is receiving a great deal of attention in business schools all over the world: What do entrepreneurs want from the state and what should the state be prepared to give them?

For the last several years data have been gathered by several institutions, including the World Bank, to understand what motivates business people, what discourages them, what they perceive as the do’s and don’ts of the role of the government, and how they are influenced by the changes in the international environment.

The bank publishes its findings in reports that appear every year under the title of ‘Doing Business’. It also carries out detailed analysis of the situation in individual countries and presents its findings in what are called ‘Investment Climate Assessment.’ This has been done for Pakistan.

However, the latest ICA report for Pakistan remains unpublished because of some easy-to-resolve differences between the authorities in Islamabad and the bank. This is unfortunate since the report is extraordinarily rich in information that would be of benefit to the policymakers. Private institutions have also entered this field of endeavour.

Some interesting data have been released by the Legatum Institute in London based on a survey of 4,000 entrepreneurs, business managers and aspiring entrepreneurs conducted by YouGov. Most of the people surveyed are in China and India. These two countries were selected since even with the pull back by the state, they are following two very different models of development. Legtum’s Ryan Streeter has analysed the results and presented them in an article published recently in The Wall Street Journal. His findings are important for both Pakistan’s policymakers and entrepreneurs as they address the problems the country currently faces.

“Entrepreneurs in both countries (China and India) are bullish”, writes Streeter. “Nearly half of the respond ents believe their societies are more welcoming of entrepreneurial activity now today than 10 years ago, and only one-quarter in India and one-third in China believe the global financial crisis has seriously hampered the prospects for new businesses. The vast majority believe their lives will improve dramatically in the next five years.” That the entrepreneurs from these two countries are bullish about the future is not surprising. Both countries are speeding ahead with development; China continues to see its economy grow at the rate of more than 10 per cent a year while the Indian economy has begun to approach that number. On the other hand, if a similar survey were to be conducted in Pakistan where the economy is struggling at a rate barely more than the rate of increase in population, entrepreneurial sentiment would be very different. Business confidence is an important part of business behaviour.

The YouGov survey identifies two different styles of entrepreneurship that have emerged in China and India. The differences concern the way the business looks at the government and the role it actually plays and should play in their lives. The differences begin with the reasons for launch of businesses. An overwhelming majority of Indian business people name “being my own boss” as the most important reason for going into business.

However, family tradition and expectation are also important reasons. The same is probably true for Pakistan. This is the reason why in these two South Asian countries business ownership remains concentrated in certain communities. The South Asian business people are closer in this respect to American entrepreneurs who, according to a survey conducted by Kauffman Foundation in 2009, are more likely to cite “owning my own company than “building my wealth” as the main reason for launching businesses.

In China the most popular reason cited for starting business is to earn more money. It was a sense of this that led Deng Xiaoping, the father of modern China, to declare that it was “glorious to be rich”.

In China the state’s effort to promote business development is also ci ted as an important reason for entering the field of entrepreneurship. Nearly half of Chinese business people identified state efforts to encourage entrepreneurship while less than onefifth of the Indians said that the state was a factor in their decision. One reason why the Chinese were positive about the role of the state was the access to the government-owned banks for credit to set up businesses.

Almost one-half of the Chinese already in business had obtained loans from the government compared to only 19 per cent in the case of entrepreneurs from India. The Indians were much more dependent on families and friends for getting finance to set up businesses. Again, the same must be true for Pakistan. The Chinese look to the government for help with building contacts with foreign investors and foreign markets. The Indians are more reliant on their own initiatives in part because the government is weak in India compared to the one in China.

The researchers who have looked at the data find the Indian model more sustainable than the one being pursued by the Chinese. According to Streeter “because India’s entrepreneurs have succeeded amid dysfunctional government and financial institutions by developing a kind of independent and experimental ingenuity, it stands to reason that the enterprising class would prosper even more were India to reduce barriers to business and clean up corruption”.

To me this conclusion once again sets up the approach to business development as an either or proposition in so far as the role of the state is concerned. There are certain things the state must do not only to build investor confidence but also to protect the citizenry from the profit-seeking behaviour of entrepreneurs. It is right for people to invest in business in order to make money. It is right for the state to ensure that money is made not at the expense of the citizenry.

[B][U][CENTER][COLOR="darkgreen"][SIZE="5"][FONT="Georgia"]Crisis is a terrible thing to waste’ [/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B][U][CENTER] Once the last amount of floodwater has flowed into the Arabian Sea, Pakistan will be a transformed place. The question is whether this transformation can be managed by those in power or will it be forced on them? [/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 23 Aug, 2010[/B]

WITH so much destruction around after what were one hundred year floods, it is difficult to talk about hope and opportunities. But there are opportunities in crises only if those in positions of power are prepared to work for bettering the country’s future.
Those who know and have studied Pakistan’s history are comparing the floods and the destruction they have wrought with what happened right after the British hastened their departure from India.After accepting Muhammad Ali Jinnah’s demand for the creation of a separate homeland for the Muslims of British India, the colonial rulers left the new country to its own devices.

It would have been difficult to create a new country even in ordinary circumstances but when Pakistan was born what it had to deal with were many extraordinary developments. Among them was the mass killing of people on the basis of religion. Pakistan had then only 30 million people. To these were added another eight million who came from India with no possessions but only hope about the future.

There was a net addition of two million people since six million Hindus and Sikhs left in the opposite direction, leaving Pakistan for India. When Pakistan took its first population census in 1951, 25 per cent of the people were born outside the country. This was the largest movement of people in human history and Pakistan then had the largest proportion of refugees in its population.

But there are a number of important differences between the situation today and the situation in the summer of 1947. There was a huge movement of people then but not much destruction of physical capital. Then there was little capital to destroy.

Now, more than 60 years later, the economy is much larger and structurally very different. There are also almost six times as many people cramped into the same amount of space.The loss of life this time around has been much less that was the case in 1947. No firm estimates are available but it has been speculated that about a million people were killed or injured in the civil disturbances that accompanied the transfer of population. But the proportion of the population affected is comparable.

Then, as already indicated, one quarter of the population was directly impacted. The proportion at about 30 million people directly or indirectly affected by the floods is one-sixth of the total population. The people who then left did so with practically no assets; that is also the case with the people on the move today. However, then millions of displaced people were settled on the lands vacated by the Sikh peasantry or on the properties left by Hindus and Sikhs in the urban areas. Today’s displaced people don’t have that option available to them unless the government, as discussed below, creates it for them.

One important outcome of the crisis of 1947 was that it created a major structural change in the economy and in the political system. Within a few years, Pakistan was less dependent on agriculture and became more reliant on industry and modern services. It also went through a dramatic reorienta tion in international trade Before independence, the areas that became today’s Pakistan traded almost entirely with India. By 1950, India was no longer the dominant trading partner. New markets were found in the West and in Japan. There were also changes in the structure of politics. As the refugees settled down they were able to wield power that was disproportionate to their numbers. This happened at the expense of the landed community.

It is reasonable to expect that similar structural changes will occur as a result of the current crisis. Once the last amount of flood water has flown into the Arabian Sea, Pakistan will be a transformed place. The question is whether this transformation can be managed by those in power or will it be forced on them? There will have to be changes in three areas: a move away from dependence on foreign flows, providing opportunities to the displaced people in the economy, and changing the structure of the government so that it becomes more responsive and adapt at handling crises.

As has happened so many times before, the policymakers during crises turn to the world to provide help. The same approach has been adopted once again. But the response has been less satisfying from Pakistan’s perspective. There are a number of reasons for this.

Pakistan is not a popular country these days in the West. Fareed Zakaria has called it the supermarket of terrorism. He and other people have estimated that 80 per cent of the recent acts of international terrorism can be traced back to Pakistan. Also, there is an aid fatigue.

Pakistan has turned up with a begging bowl in hand so many times before. And, there is an im pression that the government was slow to respond unlike the situation in some other countries – China is an example – that are also dealing with natural disasters. Those who give – and this includes governments, non-government organisations and people in general – would like to see that those who are in charge are doing everything they can in addition to asking for foreign help.

Some economists who have studied crises maintain that they are an essential parts of the way economies progress. “Crisis is a terrible thing to waste” said Rahm Emanuel, President Barack Obama’s chief of staff. He was, of course, referring to the financial crisis the Obama administration inherited from the Republicans. When the history of the Obama administration gets to be written, it will be recognised that it introduced a number of important structural changes that would not have happened in ordinary times. There are lessons in this for Islamabad.

By far the most important lesson is the need to become self-reliant. That can only happen if the rate of domestic savings increases and the tax-to-GDP ratio is improved. This will require the rich and the upper middle classes to begin to pay tax es and augment the resources of the government so that in difficult times it does not have to resort to the begging bowl. The upper income groups will have to give more to the economy and the society.

Much of the displacement of people has occurred in the areas where there are large land holdings. There is an opportunity to introduce a meaningful land reform in the affected areas and settle the displaced people on the land the government should acquire. There is also a lot of government land in various parts of the country. Some of this should be used to settle the affected and the practice of giving land grants to the senior military officers should be discontinued. And incentives should be given to the private sector to set up labour using industries to provide employment to the people who have lost all they had as a result of the floods.

A good government would turn this crisis into an opportunity for bringing about structural changes in the economy and the society that will not only reduce the pain being suffered by the people who have been terribly hurt. Such structural changes will also help the country in the long run. But a good government must have the capacity to think strategically.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Rise of Indian-Americans[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][U][I][CENTER]The Indian-Americans rank among the most highly educated ethnic groups in the US. In terms of political influence, the Pakistani-Americans are way behind the Indian-Americans.[/CENTER][/I][/U][/B]


[B]By Shahid Javed Burki
Tuesday, 24 Aug, 2010[/B]


THE susceptibility of the American political system to money is well known and well documented. One peculiar thing about the system is that the po litical parties do little to finance their candidates for thousands of offices around the country.
That is left almost entirely to the can didates who go about soliciting funds from friends and allies and from those who will stand to benefit if the person they have supported wins the election. That this is the way the system works was recognised decades ago by the small Jewish community in the country that wields political weight that far exceeds the number of people of the Jewish faith in the American population.

But it takes more than money to gain influence. If it had just been money, the Arabs, with loads of wealth, would have gained more power than the Jewish com munity. That did not happen for the simple reason that they did not get organised and did not use their dispersed diaspora effectively to gain influence. The Jewish experience has been well studied and learnt by the rising Indian American community. There are now 2.5 million Americans of Indian origin.

According to the United States commerce department that is responsible for conducting population censuses and analysing population data, the IndianAmericans rank among the most highly educated ethnic groups in the country and they have the highest per capita income of any ethnic group in the country. The income per head of the IndianAmerican community is 20 per cent greater than the American average.

According to a recent report in The Washington Post filed by Krissah Thomson, “in addition to Nikki Haley, the barrier-breaking Republican nominee for governor of South Carolina, Indian-Americans are campaigning this year for congressional seats in Pennsylvania, Kansas, California, New York and Ohio. More than a dozen serve in senior positions in the Obama administration, including US chief information officer Vivek Kundra and USAID chief Rajiv Shah. Louisiana Governor Bobby Jindal, the first Indian-American governor, made the Republican shortlist for vice president in 2008.” In fact, the Republican party seriously considered Jindal as a candidate for the presidential elections of 2012 and he was invited to speak on behalf of the party after President Obama’s first address to Congress. It was his lacklustre performance that took some shine off his career and meteoric rise.In my own work on the Pakistani diaspora in the United States I have emphasised that in terms of the proportion of the Pakistani population, its size is larger than that of India’s. The Indian number is 2.5 million which means about 0.2 per cent of the homeland population. Pakistanis number at least 800,000 which makes the PakistaniAmerican diaspora close to 0.5 per cent of the homeland population. But what counts are the absolute numbers and there are three times as many Indians as Pakistanis in the United States.

However, their per capita income is about the same as the level of education. Unlike Pakistani diasporas in the UK and the Middle East, most Pakistanis who have migrated to the United States are professionals and their children have entered some of the more important professional groups in the country. In terms of political influence in the United States, though, the Pakistani-Americans are way behind the Indian-Americans. There are several reasons for this. Among them the two most important ones are perceived as religion and the inability to get properly organised. Religion was also a negative factor that the Indian-Americans had to overcome.

For Pakistanis, ever since 9/11 and the continuing terrorist activity originating from the Muslim world, Islam has been under siege in the United States. There can’t be a better illustration of this than the controversy surrounding the plans to build a mosque and an Islamic centre near ‘ground zero’ in New York City where the twin towers stood before they were brought down by Muslim terrorists on Sept 11, 2001.

As reported by The New York Times, “the arguments against the Muslim centre appear to be resonating. Polling shows that a majority of Americans oppose building it near ground zero. Some national leaders in stump speeches, Twitter messages and op-ed articles have turned angry denunciations of the plan into a political rallying cry that they say has surprising potency.” The other problem relates to the absence of organisations that can advance the political careers of people of Pakistani origin. The Indian effort started modestly; five years ago when a group of staffers on Capitol Hill started a club they called the Desi Power Hour. According to Thompson, “today … that once-casual gathering of legislative aides, communications consultants, tech gurus and fundraisers has grown into an influential political network that undergirds the record number of Indian Americans running for political office this year”. Nothing comparable exists for the Pakistani community.

Why should it matter if the Indians in the United States gain important political positions while the Pakistani community languishes? It would not matter if the two countries were at peace and did not always work on the opposite side of every political equation. I have argued on several occasions in this space that it is to Pakistan’s advantage to develop strong economic and trade relations with India. However that is not happening. If anything, the recent meeting of the foreign ministers of the two countries in Islamabad has set the process back.

The unfortunate statement of the British prime minister about Pakistan regarding terrorism in India before an audience of Indian business people has worsened the situation. With relations between the two countries not improving, the two communities in the US tend to work against one another in the political field.

For instance, many of the onerous conditions attached to the Kerry-Lugar bill last year were the product of intense lobbying by the Indian-Americans. It is important, therefore, for the PakistaniAmericans to also come together and begin to exercise influence that should be theirs given their size and economic stature.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]State and the crisis[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 30 Aug, 2010[/B]

THIS may be a good time to begin to think about giving the economy gravely damaged by the floods a different focus.

There is a consensus building up among economists who are watching the unfolding economic situation and social disaster in Pakistan that it will take a long time for the economy to recover. Such is the extent and depth of the damage caused that the economy may not return to the path of growth for as long as five years.

In the meantime, the country will have to live on foreign aid which, given the reputation for corruption and inefficiency of the government, will be provided only grudgingly.

The international community is also looking for signals that those who govern from Islamabad are prepared to develop a strategy that, over time, will provide a firmer footing for the Pakistani economy. In order to do this Islamabad needs to think big and begin to place the economy on a different track that will provide it with dynamism.

Economists who have studied the economies that were successful in catching up with the leaders concluded that the state has a critical role to play and that that role will be different in different country situations. Alexander Gershchenkron, a Harvard University economic historian, was the pioneer of this line of thinking. He studied how France caught up with Britain as the latter took off with the help of the Industrial Revolution. Paris let the state take the lead in creating conditions that would help France to close the gap between its economy and that of Britain across the English Channel.

Germany, initially left behind by both Britain and France, developed a model in which the state encouraged close collaboration between the industrial and financial sectors. The Russians also turned to the state and allowed it to climb the commanding heights of the economy while suppressing private initiative. France and Germany succeeded in their catch-up efforts; Russia failed totally.

In the 1990s, the World Bank studied the catch up efforts of the various miracle economies of East Asia and concluded that the state, once again, was heavily involved in this effort. It invested in human development; selected the “winners” for encouragement and support; and forced the financial sector to invest in the winners while allowing banks and other financial institutions to obtain cheap resources from depositors.

Unlike the Soviet Union, the East Asian state did not create monopolies in the public sector. It encouraged the favoured private sector industries to compete with one another; letting the weaker companies to fail and exit. This is the way the Koreans encouraged the development of world class firms such as Samsung and Hyundai and let weaker companies such as Daewoo to leave the scene.

Initially the South Asian state also sought to place itself on the commanding heights of the economy. India did it under Jawaharlal Nehru, the country’s first prime minister who governed for uninterrupted 17 years. His efforts only succeeded in producing what the Indian economists themselves have called the “Hindu rate of growth” that was only marginally better than the rate of increase in population. Pakistan adopted the Indian model in the early 1970s when Zulfikar Ali Bhutto came to power.

While Nehru had not nationalised industries and financial institutions, Bhutto brought the enterprises in these sectors under the control of the government. The unintended result of this move to enormously increase the presence of the state in the economy was that it discouraged the private sector from investing. The economy slowed down appreciably. Also the expanded state increased the opportunities for corruption by both politicians and bureaucrats.

The purpose behind recalling this history is to alert the policymakers not to make some of the mistakes that disfigured the structure of the economy as they begin to reshape it to place it on a stronger footing. The present crisis has provided some opportunities that must not be wasted. Pakistan needs to catch up with other economies of Asia. It has been left behind by India by a wide margin; even Bangladesh, once the poorer part of Pakistan, is fast catching up with what is now Pakistan.

The new economy needs to be built on a number of pillars with the state playing an important role along with the private sector. What should the state do while attempting to restructure the economy and what kind of help should it secure from the international community?

The world has been fully alerted to the problems Pakistan now faces. It is preparing to help. That help could be directed into not only repairing the damage that has been done by the floods. It can go beyond that. I will take up next week the question of what kind of help Pakistan should aim to solicit from the world. Today the focus will be on defining the role of state.

In defining its role, the state should do what cannot be done by the private sector. This means getting involved in at least three activities. The first of these is improving the quality of governance. This, as most observers of the scene recognise, has declined perceptibly over the last several years. Democracies have a built-in mechanism for correcting errant behaviour by throwing out the offending elected officials. But elections are spaced at intervals during which much damage can be done.

Besides, in political and social systems such as Pakistan, the opportunity for making change is considerably limited. Economic dependence of much of the electorate on the elite and the continued prevalence of the “baradari” system means that it is not easy to, as the saying goes, “throw the rascals out” during elections. What is required is a built-in system of accountability that has the ability to ensure that all those who hold and exercise power are answerable to an incorruptible authority.

Since the early 1990s Pakistan has experimented with different accountability systems. Unfortunately the systems put in place themselves came under the influence of political masters and became corrupt. Given this history it may be prudent to establish a commission of persons chosen by the parliament that has full authority over an institution such as the current National Accountability Bureau. This will subject the NAB itself to the same kind of accountability that is envisaged for senior judiciary in the 18th amendment.

The second activity for the state is to select the “winners” – sectors as well as enterprises within the sectors – that will be supported in order to move the economy towards greater export orientation. Agriculture including livestock is the sector that has the greatest potential in this context. It is also the one that has been hurt the most by the floods.

But helping the sector to acquire dynamism will need a combination of state-supported initiatives. These include provision of subsidised credit, research and extensions, and identification of external markets. Automobiles is one other sub-sector that could be helped with emphasis on supplying to such rapidly developing industries as those in China and India.

The third area of attention by the state is the one that has been talked about a great deal – development of the country’s large human resource. Here again the state and the private sector need to work together.While the emphasis should be on improving the quality and accessibility of basic education, development of skills for a modern economy must also receive considerable attention.

There are other things the state must do to help the economy out of the deep crisis in which it has plunged as result of the floods. This is a good time for the state to develop a strategy for the future.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Four big ideas[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B][U][CENTER] The storm through which Pakistan is currently passing can only be dealt with if the leadership comes up with a big idea that would transform society and prepare it for the 21st century. [/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 31 Aug, 2010[/B]


ONE way of looking back at Pakistan’s 63-year history is to spot some of the big ideas that have shaped the country — its society as well as its economy. There are at least four of these that should occupy the top of any historian’s list.
The first, of course, was the idea that the Muslims of British India could not live in a Hindu-dominated albeit independent state. Mohammad Ali Jinnah articulated that idea and foun ded the state of Pakistan. Jinnah did not wish to create an Islamic state, only a state that would serve the social, economic and political interests of his community.

It was only after the ‘Muslimisation’ of Pakistan that, as a result of the migra tion that accompanied the partition of British India, Islamic groups gained the strength that would not have been possi ble had other religions continued to dilute the influence of their radicalism.

The country Jinnah created lasted for less than a quarter of a century in its original form. In 1971, it broke into two parts, a Bengali Bangladesh and a multi-ethnic Pakistan. The Bengalis winning independence from Pakistan was an indication that ethnicity was a more powerful basis for nationhood than religion. Will what is left of Pakistan survive as a nation state is a question that is being asked by many, not only by those who opposed the demand for the creation of a Muslim state in the first place. This big idea has not failed but is currently under a great deal of pressure.

The second big idea was put forward by Gen Ayub Khan, Pakistan’s first military president. This idea took its cue from the thinking then that the South Asian ‘soft state’ could not ensure the broad-based development that was needed to address the problem posed by the presence of extreme poverty in the subcontinent. The term ‘soft state’ was coined by the Swedish economist Gunnar Myrdal in his seminal work The Asian Drama which won him the Nobel Prize. Ayub Khan used this thinking and created a political and economic system that restricted popular participation in government affairs while allowing considerable space to well-trained and motivated economists and planners to move the country forward.

The idea worked for a while. For almost a decade, the Pakistani economy outperformed other South Asian economies. It was during this period that Pakistan’s per capita income passed that of India. But the idea could not be sustained; the political system did not have the resilience to absorb some of the discontent that inevitably results from rapid economic growth that does not pay enough attention to income distribution.

We owe the third big idea to Zulfikar Ali Bhutto who took a page out of the discredited Indian model of development and put the state on the commanding heights of the Pakistani economy. However, while Jawaharlal Nehru, India’s first prime minister and the inspiration behind the economic model that yielded the slow ‘Hindu rate of growth’ for the Indian economy, did not nationalise the industries and financial institutions that were in the hands of the private sector, Bhutto took this route to expand the presence of the state in the economy.

The results were disastrous. Nationalisation not only slowed the rate of growth of the economy but also stunted the growth of the Pakistani firm. The country is still living with some of the adverse consequences of this big idea.

The fourth big idea came from Gen Ziaul Haq who aggressively brought his version of Islam into the Pakistani society. While his attempt to Islamise the political and economic systems did not succeed, his approach did have the consequence of bringing an extremely restrictive version of religion into a country that had happily followed for centuries the Sufi tradition. Zia left the country with a very unhappy legacy.

Unless the more liberal elements within Pakistani society assert their presence and rescue the country from obscurantism, the first big idea — that a state could be created to serve the Muslims of South Asia — could also suffer the same fate as the three other big ideas.

The conclusion that should be drawn from this brief overview of Pakistan’s history is not to disparage the idea of ‘big ideas’.

In fact, I would argue that the storm through which Pakistan is currently passing can only be dealt with if those who are in leadership positions come up with a big idea that would transform society and prepare it for the 21st century.

This should encompass all aspects of life in the country. It should strengthen the political system so that it becomes more representative of the people it serves and provides a voice to all segments of the population. It should create an economic structure that is able to raise resources from within the country — and not only to provide for sustained development. Internal resource mobilisation should also take care of the crises that will continue to hit the country.

This will happen given the unrelenting increase in population and global warming that will melt the glaciers and bring more water into the rivers for several more years be fore they go dry and leave the land parched.

As the current crisis has shown Pakistan’s tendency to seek assistance from the world whenever a crisis hits the country is testing the patience of those who were prepared to help in the past but are now reluctant to assist a country that is unable to take care of itself. The new big idea should also address the question of the role religion should play in reshaping the society. Without a clear definition of the role of religion in politics and of the way the society should work the country will continue to be pushed into a very dark alley.

It is hard to say whether those who currently dominate the political sphere have the ability, the interest, the willingness or the capacity to act on this big idea. What is clear is that the tide produced by the floods will not only submerge a lot of precious land. It will also drown those who were elected to govern in the name of the people. There cannot be any doubt that the floods of 2010 will define Pakistan’s future in many different ways.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]China’s expanding global reach[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


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


THAT China is developing fast while the United States is struggling to find its economic feet has become an important part of conventional wisdom about the reordering of global economic power.
That China’s increasing economic muscle will also get translated into an increase in military strength and that Beijing will not be reluctant to challenge other big powers is also becoming part of conventional thinking.

For a small country such as Pakistan – small in the sense of its economic presence in the world – such power rivalries should not be of great concern. That would be so if the country was not so closely aligned to the two major powers that might come into conflict sometime in the future.

Pakistan cherishes its “all weather” friendship with China and it looks to the United States for financial help during periods of economic stress. Also China is Pakistan’s immediate neighbour and it matters a great deal which way this giant moves. Pakistan should make a serious effort to better align its economy with that of China.

But for that approach to be adopted it is important to understand China and where that large economy is headed, what are the challenges it faces as it accommodates itself to being the second largest economy in the world and what it has to offer to the countries around its periphery.

Under President Barack Obama the United States has begun to ac cept the fact that it no longer dominates the world as it used to do a few years ago. During his first visit to Asia in November 2009 as the American president he gave a speech in Tokyo en route to China in which he suggested that Washington and Beijing should work together in order to guide the global economy.

In fact he was proposing a G2 system that would sit atop a multitiered global structure that would include G8, the group of rich countries, and G20, a group that included all G8 countries as well as the world’s major emerging economies. Unfortunately Pakistan does not belong to any of these groupings. It is, therefore, forced into a passive position with respect to the evolving world economic order.

It is important to recognise that for years to come, economics will remain China’s focus. I worked on China for seven years, from 1987 to 1994, directing the World Bank’s programme in that country. It was during this time that China had to deal with what it calls the Tiananmen Square incident and the West has labelled it as massacre.

There was pressure on the World Bank from G7 countries to stop lending to Beijing, something that the bank was able to resist. Because of this crisis in the relationship between China and the West and therefore with the World Bank I had many meetings with China’s senior leaders.

They, with one voice, told me that China was not interested in playing on the world stage. Its preoccupation was with building its economy and improving the economic and social well being of its large population.That policy stance paid off and China has now emerged as the second largest world economy, overtaking Japan earlier this year.

Several economic historians study what they call the “catch-up periods” in the global economy. These are the periods when the countries that have lagged behind caught up with the leader, sometimes overtaking it. This type of analysis was given prominence by Alexander Gershchenkron, the Harvard professor generally regarded as the most influential economic historian of his time.

He studied the rise of France and Germany – and later that of the Soviet Union – as these countries attempted to close the gap with Britain the leading economy of that period. Later other historians extended this analysis to study the rise of Japan, the “miracle economies” of East Asia and China.

China basically followed the Japanese and East Asian catch-up model. It followed a production oriented approach that had several components.There were significant transfers of income from households to manufacturing. This was done by the state holding interest rates low thus rewarding investors at the expense of savers. This led to very high rates of investment which increased steadily and reached an extraordinary level of 46 per cent of national income in 2007, increasing from an already high 32 per cent in 1997.

At the same time household consumption fell from 45 to only 36 per cent. The state run as well as privately owned enterprises were encouraged to export. They were helped by the state by keeping the rate of exchange low compared to the currencies of the countries that were the principal buyers of manufactures. In order not to allow the exchange rate to appreciate, the state purchased large amounts of foreign currencies thus building up large foreign currency reserves.

As Financial Times’ Martin Wolf puts it, “China is Japan ‘plus’: its investment rate is higher, trade sur plus larger, rate of consumption lower and exchange rate intervention bigger.” This model was dependent on the state playing a decisive role in guiding the economy, a fact that was emphasised by Prime Minister Wen Jiabao at the Asia Davos meeting held in midSeptember in Tianjin, the port city close to Beijing.

Investment, a significant amount of which was made by the state, was the driving force behind economic growth. “We owe our achievements to the implementation of the stimulus package by the Chinese state”, he told his audience. As a result, the economy grew by 9.1 in 2009 and an incredible 11.1 per cent in the first half of 2010.

But the question whether the model followed by China is sustainable over time is being asked not just by China watchers in the West. It was also raised by Prime Minister Wen at the Tianjin meeting. “In the case of China, there is a lack of balance, coordination and sustainability in economic development”, he said. The Chinese leaders have continued to believe that they need high rates of economic growth in order to secure social and political stability.

An increasing rate of investment is needed to maintain a politically and socially desirable rate of economic growth. But this cannot be maintained at the pace achieved in the past decade or two. At some point investment will stop rising and the rate of growth will slow down.

For instance, if political imperatives demand a growth rate of 10 per cent a year, it may need investment rate of 50 per cent of national income. This produces a conun drum the Japanese have already encountered – the “bridge to nowhere” syndrome when the state ends up investing in things the economy does not need.

At some stage – and most economists believe that stage has been reached – the model of development must change and household consumption must take precedence over investment. This readjustment and rebalancing will produce tensions since it will mean reducing corporate profits and employment growth in the manufacturing sector. Once this restructuring of the economy begins to occur, it will have a profound impact on international trade. China will not need as many capital goods as it currently needs from the West and will require basic goods of consumption that its economy will not find productive to produce.

Wages are rising fast in China and it is no longer efficient for the economy to produce cheap manufactures. Also, although China is a large country most of it is desert and mountainous and not available for agriculture. The earlier fixation on the part of the leadership to being self-sufficient is being replaced by greater confidence in obtaining food from abroad. It is these changes in the structure of the Chinese economy that Pakistan’s planners must bear in mind in order to reorient their own structure of production to take advantage of the economic colossus next door.

Pakistan has a free trade agreement in place with China. Islamabad could use its framework to increase its exports to the Asian giant. However, to be able to do that it will have to address supply side constraints in order to produce the surpluses that could be exported.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]A new twist to old ties[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][CENTER]What we are seeing is the likelihood of Pakistan becoming the focus of great power rivalry. This could have consequences that may not be all that good for the country.[/CENTER][/B]

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

ONE of the recurrent themes in my articles appearing in this space has been the need to factor in China more explicitly and more imaginatively in the making of economic policy.
I have been suggesting to both policymakers and business people in Pakistan to look more to the East than the West in order to help the national economy as well as to promote private enterprise.

For half a century — since Pakistan began to look to countries some distance from its border to build political and economic alliances — the default position has been to reach out to the West. By the West, policymakers in Pakistan have meant America rather than Europe.

As American economic and political power increased and as air travel became more affordable, Pakistan’s private and public sectors sought close rela tions with the United States. America became the preferred destination for Pakistani students going abroad for advanced education. The penetration of US markets became an impor tant goal for Pakistani exporters.

For a number of years now, Islamabad has been working on negotiating a freetrade agreement with Washington. After this year’s devastating floods, it has sought preferential access to US markets for its textile exports. Islamabad also looks to Washington for financial help whenever it needs external assistance to tide over economic problems, which is often.

In responding to these overtures it was natural for Washington to advance its own interests in Pakistan and the region to which the latter belongs. There were reasons for Washington to provide large amounts of assistance to Islamabad in the 1960s when it feared that the communist ideology would spread to Asia; in the 1980s, when it wished to expel the Soviet Union from Afghanistan; and in the early 2000s when Washington launched the ‘war on terror’. It was an accident of history that during these periods Pakistan was governed by military rulers.

Since the economy did considerably better because of the large flows of external capital into the country, an impression was created that the military was a much better manager of the econ omy. That the country did so much better under military rule was in large part because of the easy access to foreign capital whenever men in uniform were in charge of policymaking.

It is for the first time in Pakistan’s history that Washington has a strategic interest in Islamabad while the country is being led by a civilian leadership. Although the move to develop a long-term relationship with Pakistan began when George W. Bush was in power, it has acquired a somewhat different dimension under Barack Obama, his successor.

Recognising that the way in which Bush had conducted the war against terrorism had alienated much of the Muslim world, Obama is attempting to bridge the gap between his country and Muslim nations. In this endeavour, Pakistan, being the second largest Muslim country, has acquired special significance. That said, it should be noted that the conservatives among American policy thinkers have begun to focus on Pakistan not so much as a large Muslim country but as a country in which China has interest for military and geo-political reasons.

Any major transition in the world economic order will not be smooth. It is bound to produce conflicts. The recent tiff between China and Japan that resulted from the confrontation on the high seas between a Chinese fishing trawler and a Japanese coastal guard ship is one example of the kind of problems that we will see as large economies around the globe make adjustments to the redistribution of economic power around the globe.

In this particular case China was more assertive than usual and the Japanese chose to blink by releasing the captain of the Chinese vessel they had arrested. In the same vein, China is refusing to succumb to the pressure that the US is bringing to bear on Beijing on various economic issues, especially the value of its currency which Washington believes is highly undervalued. To these concerns the conservatives have begun to take note of the build-up in its blue water navy by the Chinese.

In a recent newspaper article Robert Kaplan, the author of Monsoon: The Indian Ocean and the Future of American Power, elaborated on why Washington should be concerned about the approach Beijing is now following in military matters. “The greatest geopolitical development that has occurred largely under the radar of our Middle East-focused media over the past decade has been the rise of Chinese sea power.” He notes that because of the recent build-up, China now has the second largest navy in the world after the US which is acquiring assets not from abroad but by developing a manufacturing capacity of its own. Its focus is on equipping its navy with submarines. The country now has 66 sub-surface vessels and “if China expands its submarine fleet to 78 by 2020 as planned, it would be on par with the US Navy’s undersea fleet in quantity, if not in quality,” writes Kaplan.

In order to project its power in the Indian Ocean, the Chinese are looking for ports its fleet can use. China is the on ly major global power that is bound by land on three sides. It therefore needs access to the sea from places other than its own ports that are clustered around its east coast. It is for this reason that it is said to be funding the construction of ports in Bangladesh, Myanmar, Pakistan and Sri Lanka. The reference to Pakistan is of course in the context of the port of Gwadar on the Balochistan coast.

Some American analysts also look with suspicion at China’s growing interest in Afghanistan which is reported to have trillion-dollar worth of mineral deposits waiting to be exploited. Beijing has already made large investments in exploiting copper deposits in one of the sites identified as extremely rich by a report published earlier this year by the Pentagon. Some of the mineral deposits in Afghanistan are in the areas bordering Pakistan and must stretch into Balochistan and the tribal areas of the north. This is then an additional reason for China’s interest in Pakistan.

What we are seeing, therefore, is the likelihood of Pakistan becoming the focus of great power rivalry. This could have consequences that may not be all that good for the country.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]China-India economic detente[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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

IN SPITE of the current slowdown in economic growth, Pakistan, by my count, is among the twenty eighth largest economy in the world.
Among the world’s major emerging economies it is the only one that borders the two that are the fastest growing. It has China and India as its immediate neighbours, the two economies in the new economic world that are reshaping the global system.

The large Asian economies will play important roles on the stage of the new world economy. Because of the size and structure of their populations they will also profoundly influence the global economy system.What is important from Pakistan’s perspective is that China and India are learning to work together. There is a developing economic d’etente between them. It therefore matters for Pakistan how well these two mega-economies proceed on the economic front.

It would be wise for Pakistani planners that in the strategy they develop to revive a sick economy and to set it on the road to recovery, they explicitly factor in the country’s economic relations with China and India. Ultimately the aim of policymakers should be to have the Pakistani economy grow at the rates that are expected of China and India. But for these ambitions to realise, Pakistan must look to these two countries for opportunities.

In the last few months the Indians have decided to shed their pride and have begun to take some steps to draw benefit from China’s rise rather than resent it or to aggressively compete with it. The Indian economic success has relied on developing the levels of skills of a small segment of the population in order to provide services to the developed world that the latter cannot produce on its own because of demographic constraints it now faces. With the exception of the United States and United Kingdom all other developed economies have – or soon will have – declining populations.

The two exceptions to this unprecedented demographic transition are the consequence of more generous policies towards immigration. The pool of the migrants that have already been formed in America and Britain have higher rates of fertility than the indigenous populations. They will continue to have slight increases in their populations until the middle of this century. Ultimately they too will begin to see first aging and then declines in their populations.

What are the options available to these old industrial economies to see the pattern of their consumption and its level survive and their economies to retain some dynamism? The answer lies in relying on the demographic profiles of the developing world where the populations and still young and are likely to increase for several more decades.

The large size of the Indian population was not the only reason for India’s success in using demography to its advantage. It was able to make a great success of first its IT industry and subsequently of health services and entertainment industry because of the ability to use English on the part of large segments of its population.. But in order to retain the extraordinary rates of growth in the output of these sectors, the Indians know that they must diversify their markets.

They have decided to shift their focus to countries other than the industrial world. The rethinking includes the recognition that it must extend its development model to include outsourcing not only to the developed world but also to the large emerging economies that don’t have the skills the Indians were able to develop.

In this context, New Delhi has deci ded to focus on China, a country that also has more than a billion people. China does not have a population that is comfortable with English, the lingua franca of the service sector. Also, its pursuit of one-child policy to curb the rate of growth of population is also expected to introduce demographic constraints long before India faces that situation.

About 60 per cent of India’s 1.2 billion are under the age of 25 and its population is still increasing at a rate of 1.4 per cent, more than twice that of China’s 0.6 per cent rate. But for India bringing China into the circle of its economic influence means equipping its population with working knowledge of Mandarin, China’s official language.

Without knowledge of Mandarin it is difficult to penetrate the Chinese economy. This has been recognised by most countries that want to trade with China and benefit from its extraordinary economic rise and size.To teach Mandarin to their citizens, they have looked to China for help and the Chinese have responded with some enthusiasm.

There are now 260,000 people worldwide who are enrolled in Confucius centres the Chinese have established in many countries across the globe. However, according to a report in a recent issue of the Financial Times, “India has viewed Confucius centres with suspicion and kept them out of its main centers of learning”. That is now changing under the influence of Kapul Sibal, the country’s dynamic education minister.

The minister is now encouraging institutions of higher learning to set up departments of Chinese studies which, along with teaching Chinese history, economy and business practices, will also have the interested students learn Mandarin. To quote once again from the English newspaper, Mr Sibal has “gained reputation for dynamism in a department that has been slow to respond to the enormous challenge of providing India’s millions with suitable skills to ensure India’s much touted demographic dividend does not turn it to be a curse”.

Much the same can be said about Pakistan. Is it doing anything imaginative to take advantage of its even greater demographic dividend and even greater opportunities that lie just across the border in China? The answer, unfortunately, is “not a great deal”.

In late 2008 soon after he took over as Pakistan’s president, Mr Asif Ali Zardari, I told him that focus on China should be based on a well thought-out strategy. One of the steps I then proposed was to establish an institute of China studies in Islamabad. Such an institute should provide instruction in Chinese history, its economy, and its evolving relations with the outside world. The institution should also teach Mandarin.

The president reacted enthusiastically but I don’t believe anything has been done. Without proper planning and execution, the ambition to benefit from China’s remarkable rise will remain a dream.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Improved governance[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][U][CENTER]Pakistan can generate a greater bounce in its economy than India by creating better governance. It has occurred before in the country’s difficult economic history and could happen again.[/CENTER][/U][/B]

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

IT might seem excessively op timistic — perhaps irresponsibly so — to put out the thought that the Pakistani economy, troubled as it is, could bounce back quick ly provided the country can somehow devise a set of policies to address the problems that have led to the present crisis.
We should remember that when the conditions constraining an economy are removed a bounce-back can occur. It has occurred before in the country’s difficult economic history and could happen again if the environment in which the economy is functioning is improved. In this context it is important to ask the following ques tion: what are the areas that should re ceive the attention of our policymakers?

There is now a new economic team in place that has been given the responsibil ity of managing the country’s battered finances, to strategise the future by energising sectors that can provide quick dividends and by managing monetary policy that will reduce the pressure on prices and support the revival of growth. Finance, planning and monetary policy are the traditional concerns of all economic managers and it is in these areas where the government is being advised — in fact pressured — to act quickly.

For instance, the International Monetary Fund has held back the release of the next tranche of its large loan to Pakistan since Islamabad has not made clear how it plans to raise the tax to GDP ratio. The IMF wants action by December this year. At about 8.8 per cent of GDP, Pakistan has the lowest ratio of all the major economies in the world. But before a credible tax policy can be put in place the government has to address the broader issue of improving the quality of good governance.

Attempts have been made in the past to improve the government’s mobilisation of resources through taxation. It is well known why the government collects so little: the tax base is narrow, several sources of income are exempt from taxation, the rich and the powerful can bribe their way out of the obligations they have to the state and so forth. But good governance is needed to address these and other issues.

Good governance has several elements. Four have particular importance in the context.

The first is the capacity and willingness of those in power to give attention to policymaking that would help the economy. The second is a civil bureaucracy that has the capacity to implement the policies of the government. The third concerns the establishment of an institutional structure and legal system that can ensure that all government functionaries act responsibly and within the legal framework. The fourth relates to decentralisation to ensure that policymaking as well as policy implementation takes place as close to the level of the people as possible.

Pakistan needs to move in all three areas. To indicate where the focus of policymaking should be it might be useful to compare Pakistan’s situation with that of India. Let me begin with India.

Before the near-fiasco of the Commonwealth Games, India had earned the reputation of an economy on the way to becoming one of the world’s most dynamic economies. The great difference between India and Pakistan is that the former is deeply set in its ways while the latter is in a state of extreme flux. A state of flux means that change becomes possible; the attempt to bring it about meets with less resistance than is the case when traditions are strong and the urge to retain the status quo overpowering. It is possible for Pakistan to more thoroughly restructure its system of governance than seems possible in India.

As has been demonstrated vividly by the Commonwealth Games, even in a country that has seen its economic performance applauded all across the globe economic dynamism is the result of private initiative rather than government enterprise.

It is the private sector that has led the way. Montek Ahluwalia, currently the head of the Indian Planning Commission and once my colleague at the World Bank, said to me: “If the Indian government had discovered in advance what the IT sector was about to do for the Indian economy, what it accomplished would not have happened — never.” In the contest of the Commonwealth Games, it is the private sector that delivered while the government totally failed. As Raja Lakshmi wrote for The Washington Post one day before the opening of the Commonwealth Games, the event exposed “the gap that has emerged between a government rooted in a slower-moving socialist era and a entrepreneurial class that is busy building global IT companies, the world’s largest oil refineries and spectacular structures such as the $2.8bn airport terminal”.

Vir Sanghvi, Hindustan Times editorial director, put it more bluntly: “We can brag as much as we like about the new India. But when it comes to delivering on an international commitment, we are no China. We are still corrupt, slothful India.” What distinguishes Pakistan from India is the important fact that the hold of the bureaucracy was loosened over the economy in Pakistan as a result of some of the measures adopted by the administration of Prime Minister Zulfikar Ali Bhutto. He disbanded and cast adrift the powerful Civil Service of Pakistan that had partnered with the military during the period dominated by President Ayub Khan. By dissolving the CSP, Bhutto shifted the focus of policymaking from the bureaucracy to the people’s representatives.

However, he and those who followed him failed to take the further step of creating a bureaucratic structure that would effectively implement the decisions taken by those in charge of policymaking. This is where Pakistan is today. It is my firm belief that with an appropriate structure of governance the Pakistani economy would quickly bounce back.

There is a consensus among economists that India could add as much two per cent to the already high rate of growth if it could somehow improve the working of the government. In fact Pakistan is in a better situation to do this. It can generate a greater bounce in its economy than India by creating better governance.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Harnessing sources of growth[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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

TODAY Pakistan is South Asia’s sickest economy. Its growth rate is one-third to one-fourth of India’s and less than one-half that of Bangladesh.
Some of the problems that inflict the economy are the result of natural disasters such as the Great Flood 2010. Some have been caused by the rise of Islamic extremism in and around the country that is discouraging private sector investment.

But the real reason why the country is doing so poorly is the absence of public policy that would support economic advance.

Over the last several decades, Pakistan has tried many different approaches to speed up development. Sometimes it relied on public sector to take the lead; at other times it placed its faith in private enterprise. As we know from the experience of other developing countries, policy consistency is an important factor contributing to growth and development.

If Pakistan is to interrupt downward slide in its economy and stop it before it reaches the point at which recovery will become exceedingly difficult, it will need to put in place a well thought out strategy and stay with it for several years. Such a strategy needs to have two linked objectives.

The first is to get the economy to recover from the slump into which has fallen and where it has remained for several years while other large South Asian economies have begun to smartly recover. It may have been right to blame the loss in growth to the slowdown in the global economy as a result of the Great Recession 2008-09.

That is not the case any longer. The second objective is to place the economy on a trajectory of growth that is comparable to other large economies of the region. It is the second of these objectives with which I am concerned today.

It is always helpful to look at history to develop ideas for the future – to learn lessons from it. In this context, we might analyse the sources of growth by borrowing from the work done in recent years by some economists using what they call growth accounting.

Susan Collins of the Brookings Institution in Washington is one of the several economists who have done work in this area. She has applied this methodology to study 84 industrial and developing economies. Four of these – Bangladesh, India, Pakistan and Sri Lanka – are in South Asia.

Growth accounting “provides a means for decomposing increases in output per worker into the contributions from accumulation of physical and human capital (per worker) and a residual measure of the change in total factor productivity”, she wrote recently in a an essay contributed to a book published by the World Bank.

What was South Asia’s growth experience in the past several decades? Average annual GDP growth rates for India and Bangladesh increased by two percentage points in the 19802003 period compared to the two decades between 1960 and 1980. For India the rate of national income increase went up from 3.5 to 5.7 per cent, for Bangladesh from 2.4 to 4.4 per cent. The trend in Pakistan was in the opposite direction. It declined from 5.9 to 4.9 per cent. In the three countries, the share of investment in GDP declined; in the case of Pakistan from 22.1 to 19.5 per cent.

The first thing to be noted about the pattern of growth in South Asia, therefore, is that while it was impressive for the region as a whole, it was not so much the result of accumulation of capital as was the case in East Asia where investment as a proportion of GDP was about twice as high as in South Asia.

In none of the South Asian states investment rates approached the 30 to 40 per cent range typical for East Asian economies during their rapid growth periods. Does this mean that if capital accumulation was a relatively unimportant contributor to growth in South Asia in the past it can, perhaps, remain that way in the future. Such a conclusion would be important for Pakistan since its savings rate is much lower than other economies of Asia.

Collins argues that it would be wrong to reach that conclusion. Countries in South Asia will need to increase their rates of investment so as to accumulate both physical and human capital more rapidly if they are to achieve their desired rates of income increase going forward. This has already begun to happen in India and to some extent also in Bangladesh. Pakistan, however, is falling behind with every passing day.

A country’s per capita income can be decomposed into productivity, the proportion of domestic income that accrues to the country’s residents and labour force as share of the total population. For India productivity and living standards both doubled from 1980 to 2003. The former increased by 130 per cent from $2705 to $6144 in the 23 year period. The latter increased from $1185 per head of the population to $2721.

Pakistan’s performance was much less impressive: labour productivity increased by 81 per cent, from $2916 ( when it was higher than that of India) to $5277 when it fell below that of the country’s large neighbour. Gross domestic income per head of the population increased by only 68 per cent, almost one half that of India’s. It went from $1148 to $1927.

Pakistan’s relatively poor performance is in part due to the low rate of labour participation which remains close to one third of the total workforce. This, in turn, is because only a small proportion of women work outside their homes. The rate of worker participation increased by only one percentage point, growing from 37 to 38 per cent.

It remained steady at 44 per cent in the case of India. In Bangladesh, there was a two per centage points increase with the participation rate going up from 49 to 51 per cent of the workforce. This happened because of the increase in the employment of women in the readymade garments industry.

Collins work provides estimates of the contribution made by various sources of growth to the South Asian economies. Again comparisons of the trends of India and Pakistan are instructive. In the more recent period examined by her – from 1990 to 2003 – output per worker in India increased by 3.99 per cent a year. Factor productivity contributed almost one-half to this increase with capital accumulation providing another 37 per cent. The remaining 13 per cent came from education.

In the case of Pakistan output per worker grew by only 1.08 per cent, about one-fourth that of India’s increase. Factor productivity contributed 64 per cent to this increase and capital accumulation another 43 per cent. The contribution of education was negative, taking away seven per cent from the increase in worker productivity. For Pakistan to have its economy grow at a faster pace it must invest in education. In 2000 for population in the working age – for people over 15 years – average years of schooling was only 3.9 compared to 5.1 for India.

The perspective that capital accumulation matters goes hand-in-hand with the extensive and convincing new findings by development economists linking positive growth experience with strong domestic institutions such as contract enforcement and protecting property rights. Empirical work done at the World Bank shows strong links between the structure, efficiency and efficacy of the legal and judicial systems.

All major South Asian countries are weak in this respect; Pakistan probably the weakest of all. Growth accounting, therefore, points to some of the elements that must receive attention in the design of a growth-oriented public policy. These include large increases in the rates of public and private investment, increased participation of women in the workforce, increased investment in education and skill development, greater attention to improving the technological base of the economy, and reform of the legal and judicial systems.