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Predator Tuesday, July 21, 2009 09:45 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]India’s challenges[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 21 Jul, 2009[/B]

THERE are moments in the lives of nations when those who rule can bring about profound changes in the lives of the ruled. In India, 1991 was such a moment when then finance minister Manmohan Singh, facing an economic crisis of immense proportions, chose to break with the past.

With a few bold strokes he demolished the ‘licence raj’ that had been put in place with tender loving care by Jawaharlal Nehru and his political associates. The raj had kept India stuck in an economic groove that produced what its own economists called the ‘Hindu rate of growth’ — 3.5 per cent a year when the population was increasing by almost two per cent a year.

That didn’t leave much room for the poor, and the latter, in whose name the raj had been established, suffered immeasurably. India became tremendously impoverished, with 40 per cent of the population living in absolute poverty. That proportion introduced a new term in economics — the bottom 40 per cent.

With reforms in 1991, India went on a different track. The rate of economic growth more than doubled, the incidence of poverty declined, the middle classes increased in size, and some parts of the economy got well integrated into the global economic system. By lowering the barriers on trade and encouraging the entry of foreign capital, India opened its economy to foreign influences.

The Indian brand name became valued in IT, pharmaceuticals and automobiles — even in literature, music and movies. The country seemed set to become a global economic power. The slogans ‘Shining India’ and ‘Incredible India’ coined by inventive Indian minds did not seem misplaced. And then the global economy went into a spin and affected India.

For a decade or so many serious economists — those from India included — had concluded that the global economy had become decoupled. By this was meant that a number of emerging economies were no longer as dependent on the markets of rich countries and on capital flows from them to make progress. These were the factors that produced the miracles in East Asia and turned China into an economic power house. Now a quarter of a century later, these economies had built strong economic links among themselves. Trade among them had increased and they had accumulated large foreign-exchange reserves to protect themselves from the vagaries of the international financial market.

If the West was sinking under the weight of its financial folly, emerging markets would not go down with it. But they did.

The decoupling hypothesis held sway during the good times. When these turned bad, it was clear that the decoupling hypothesis stood on shaky ground. Emerging markets soon found themselves in the grip of a credit crunch. The decision by US authorities to let Lehman Brothers sink produced a number of unintended consequences. Among these was the hoarding of cash by the large institutions to prepare for another institutional collapse.

Credit froze, including that needed by traders to finance their operations. Turning over fast — typically ranging in terms from 60 to 270 days — the total yearly flows amounted to $10tr. No matter what the destination of these exports, the countries that relied heavily on exports needed the finance. Its absence badly hurt them. One of the largest plunges in GDP growth rates occurred in Singapore and Taiwan, two countries for whom trade was an important part of the economy.

The crisis came to India through an entirely different channel. Its banking sector, mostly under the control of the state, was insulated from western finance. Its trade to GDP ratio was relatively low. But the more vibrant parts of its economy — the IT sector and the health services, for instance — were connected with the West through the links forged over time between its own enterprises and the large corporations abroad. When the latter collapsed or shrank in size, the more dynamic sectors of the Indian economy suffered. India lost close to 2.5 percentage points in its rate of growth, with the GDP increase declining from about nine per cent a year in the five-year period before the crisis hit the world economy to 6.7 per cent in 2008-09.

The Indian economy is showing another weakness: the widening in income disparities, both interpersonal as well as inter-regional. This was vividly portrayed in a study sponsored by the Asian Development Bank.

According to it a clutch of domestic billionaires control as much as 20 per cent of the country’s GDP and 80 per cent of the assets of the firms listed on the Bombay stock exchange. A significant part of this wealth was accumulated in the last couple of decades when the Indian economy began to open its gates to the world outside. An important part of this model was to push the state to the back seat of the economy. And, a very large proportion of the very rich come from the western part of the country. In other words the new riches are associated with the western economic model and with parts of the private sectors that operate at some distance from the government.

A vivid portrayal of the problem comes from the novelist Arundhati Roy in her latest book, Listening to Grasshoppers. While one arm of Indian society is “busy selling off the nation’s assets in chunks, the other to divert attention, is arranging a buying, howling and deranged chorus of cultural nationalism,” she proclaims. She discusses the recent economic boom as having merely created “a vast middle class punch drunk on sudden wealth and the sudden respect that comes with it — and a much, much vaster underclass”. She is extremely concerned that unless the state steps in to remedy the situation, the country may have to face a serious socio-political situation.

Predator Monday, July 27, 2009 01:54 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Deteriorating economic competitiveness[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, July 27, 2009[/B]

WHILE there is not a great deal of academic interest in Pakistan, its economy is being studied and analysed by a number of multinational institutions.
The World Bank continues to issue reports on the country’s macroeconomic situation and on some of the more important sectors of the economy. The Investment Climate Assessment, 2009 is one of the recent World Bank efforts focusing on some of the salient features of the country’s industrial economy.

The most recent entry into this genre of reports about the prospects of the economy is the State of Pakistan’s Competitiveness Report, 2009 launched by in the United States by Shaukat Tareen, Pakistan’s de facto finance minister. The report should be of tremendous interest to the policy makers since it presents the picture in Pakistan in the context of a comparative country framework.

Not unlike the World Bank report on investment climate, the Competitiveness Report by the Islamabad - based Competitiveness Support Fund, has both, good and bad news about the economy. It uses the methodology developed over the years by the World Economic Forum, a prominent international institution, perhaps best known for its annual meeting in Davos, Switzerland. WEF also publishes comprehensive reports on competitiveness, trade, information technology, gender and tourism.

The Global Competitiveness Report published by the institution is, “ the most widely read and respected ranking of the competitiveness of the countries since its inception 30 years ago.” The most recent report examined 134 countries across 113 different macroeconomic and microeconomic indicators. The indicators are grouped into what the World Economic Forum calls, the “pillars”. The assessment about the performance, of the countries is based on hard quantitative data and surveys. Last year 12,297 business leaders were surveyed across the developing world.

The bad news for Pakistan is that its overall ranking has slipped by nine places, from 92nd out of 131 countries included in the assessment in 2007-08, to 101st out of 134 countries examined in 2008-09. What is even more troubling is the fact that this slippage has occurred across the entire spectrum of indicators. Deterioration has occurred in all the categories into which the 12 pillars are grouped. These are “basic requirements”, “efficiency enhancers“ and “innovation and sophistication.” In terms of Pakistan’s place in the array of countries, the most significant slippage has occurred in the area of “financial market sophistication” where the country’s position has dropped by 23 places. In “goods market efficiency” the country is down by 18 places; in macroeconomic stability by 15 places; in innovation by 13 places; and in both infrastructure and tech nological achievement by 11 places each. Not surprisingly, the least amount of slippage has occurred in market size where Pakistan has dropped by one place. This indicator is based on the size of the population.

Another way of reading the results is to look at those pillars of competitiveness in which Pakistan’s place is even worse than its overall rank. These are four of these.. Again, not surprisingly, the country does very poorly in the area of “higher education and training” where it ranks 123rd among the 134 countries included in the analysis. “Labour market efficiency”, with a rank of 121st is the next worst followed by “macroeconomic strategy” and “health and primary education” where the rank for both is 116th.

In what lends importance to this work is that it provides a rich array of public policy tools, Islamabad could use to place Pakistan’s economic performance on to a higher plane. In that context the 2009 report includes information from some other areas surveyed by the World Economic Forum. These include the Global Enabling Trade Report, where Pakistan ranks 84th out of 118 countries included in the survey.

In terms of the indicators used in this analysis, Pakistan has the worst ranking _ the 100th -- in what the authors call the “proclivity to trade”. This measures the importance, both public policy makers and the entrepreneurial class attach to trade. The best reading in this area is “regulatory environment” in which the country ranks 40th.

The Global Information Technology Report is the second World Economic Forum document from which the authors of the 2009 report get their information. Here Pakistan ranks 98th among the 134 countries included in the survey. The troubling feature of this report is the sharp decline in Pakistan’s rank over the last three years, from 67th in 2005-06 to 98th in 2008-09. The number of countries examined increased by 19 in the three year period which means that Pakistan’s drop of 31 places cannot be explained entirely by the expansion in the size of the universe surveyed.

According to the report, the deterioration in Pakistan’s relative position was “led largely by steep falls in the indicators relating to the government’s use of technology (a drop of 23 places), business readiness (a drop of 15) and political and regulatory environment (a drop of 14). “Compared to last year, all indicators declined except the individual usage indicator which increased by nine ranks”.

The news for Pakistan gets really bad when the 2009 report brings in information from the Global Gender Report. The assessment is even worse than what the development community believes is happening in Pakistan.. . According to the report, “despite the notable example of women playing leadership roles, the World Economic Forum’s hard data and surveys show that Pakistan’s ranks 127th out of 130 countries”.

Discrimination against women is across many fronts, particularly in education, health care and economic participation and opportunity. In the education of women – enrollment in primary education _ Pakistan now ranks 127th out of 130 countries; in terms of women’s life expectancy the rank is 129th and in economic participations and opportunity, it is 128th.

Culture is an important contributor to women’s backwardness but it is not the only reason. Poor policy has played a significant contribution. In the report on the budget for 2009-10, Hina Rabbani Khar pointed with some pride in her budget speech to the fact that she was the first woman to take on that task in Pakistan’s history and she was doing it in front of the first female speaker of the national assembly. Women were doing relatively well in the political field but that presence had not translated effectively into public policy for importing women’s wellbeing.

The broad conclusion one reaches from the findings in these important reports is that Pakistan has to do hard work across a wide front to improve the competitiveness of the economy.

Ghulamhussain Tuesday, July 28, 2009 05:05 AM

[SIZE="4"][COLOR="DarkRed"][B]China’s economic impact[/B][/COLOR][/SIZE]
[B][I][U]By Shahid Javed Burki[/U][/I][/B]
[B]Tuesday, 28 Jul, 2009[/B]


CHINA’S economy is being restructured in several different ways. Some of these are visible; some are more difficult to discern. How this happens will have great consequences for the rest of the developing world, especially for a country such as Pakistan.

Today I will focus on three aspects of this change: one, China’s likely role in the evolving global economic order; two, the revival of the country’s economy at a rate not anticipated by most China experts; three, the process of urbanisation in the country and how that might impact on the structure of the economy.

For the last several months, China is playing an active role in several different forums. These include the G20, the G8+G5 and the Shanghai Cooperation Organisation. For several reasons these organisations are unlikely to be the real driving forces in the global economic system. The G20 was being built on top of a system that had creaky foundations. The focus remained on the US and Western Europe. The latter in particular is no longer the most vibrant part of the global economy.

There may not, after all, be such a widening of influence and reshaping of the global economy as was believed would be the case only a few months ago. G8+G5 has demonstrated its inability to take important decisions on global economic matters. The SCO is an Asian organisation that can’t work for the entire world. What is likely to emerge is G2, a formal or informal arrangement between the US and China. The slow move towards multipolarism may be pre-empted by the continuing strength of the economy of the US and the rise of China.

There is now consensus among policy analysts the world over that China is well on its way to becoming a power house in the global economy. Even if it does not become the world’s largest economy in three to four decades, as some believe it might, it will certainly be the second largest after the US.

The fact that the country’s economy has begun to recover at a faster pace than was expected in the spring of 2009 is a testimony to its strength. This may happen while the rich countries are finding it difficult to shake off their economic malaise. When the global economy was in a deep recession Chinese dependence on the markets in developed countries was expected to hurt it badly. That did not happen. The World Bank has now forecast China’s growth rate at 7.2 per cent in 2009. While this is a long way down from the 11.9 per cent in 2007, it is still remarkable, given the sluggishness in other parts of the world.

China is likely to achieve this impressive rate of growth in spite of a fall in the rate of export growth from 20 per cent in 2007 to eight per cent in 2008 and to a forecast of minus 10 per cent in 2009. The country, it appears, is no longer that dependent on exports for growth as was believed before the present crisis hit the globe. It may lead the emerging economies towards ‘decoupling’, a concept according to which these economies are no longer very dependent on the world’s rich nations. How will this new China affect the global economy and its political system?

The current thinking in the US emanating from a number of policy institutions on both coasts of the country sees the coming global arrangement from the bipolar perspective, in part because such a system is familiar to policymakers as well as policy analysts. This is one reason why the administration of President George W. Bush paid so much attention to cultivating a new relationship with India. There is a simple idea behind this. Developing India as a counterweight to China will further America’s interests in Asia.

Among the features that will mark China’s rise, several have no historical precedent. Take for instance the pattern of urbanisation in the country. China’s urban future will be shaped all along the country’s east coast, from Dalian in the northeast to Guangzhou in the southeast. Within the next few decades, we will probably see 500 million people living in this narrow strip of land with a combined income of $10tr and income per capita of $20,000. The concentration of such a large number of people with high incomes in a narrow strip of land will have enormous consequences for China’s own economic growth pattern as well as on the global economy.

For instance, China is unlikely to concentrate on the development of land-intensive economic activities. This doesn’t only mean a move away from agriculture but also from the land-intensive patterns of manufacturing. China’s economy in terms of space use will go vertical and this will mean moving away from economic activities that need a great deal of ‘flat space’ towards those that can be carried out in high-rise factories.

What this implies is the shift not only from agriculture but also from traditional manufacturing. China will concentrate more and more on knowledge-intensive production systems. In fact it is encouraging this move by investing large amounts of public resources into developing the needed human resources.

What does all this suggest for Pakistan? Some conclusions are obvious. Islamabad must cultivate a close economic relationship with China and it should be based on a carefully worked out strategy. Pakistan can support China’s development as a country with a high population density along the country’s east coast by getting engaged in the provision of goods and commodities that will be needed. Pakistan could also concentrate on the activities that China will not be able to do on its own. That would mean highly linked industrial sectors, with Pakistan supplying parts and components to the Chinese industry. What is needed is a relationship based on careful thought and planning.

Predator Monday, August 03, 2009 02:34 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]How can the economy get off the rollercoaster ride?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 03 August, 2009[/B]

THE economy has been on a rollercoaster ride ever since the country gained independence more than six decades ago. At this time it is going through one of its periodic downturns. This one is more severe than many experienced in the past. The reason is not hard to understand.
The country is passing through a perfect storm; dealing simultaneously with a number of crises. All of these are not related to economics; some have their origin in politics, some in the structure of the society and some in the rise of Islamic extremism.

The questions the policymakers must address are obvious. One, how to pull the country out of its present economic mess? Two, how to ensure that it gets off the rollercoaster and gets on to a path that would take it towards higher and sustainable rates of economic growth and social development?

There are several answers to these two questions. The most tempting one the policymakers have always given is to suggest that the country needs a larger flow of external capital to augment the pitifully low rates of domestic savings and tax- to- GDP ratio. Whenever the geopolitical situation was conducive, Pakistan managed to obtain large doses of foreign money.

Given the ongoing struggle with Islamic extremists in which Pakistan now has taken a decisive position, Islamabad will manage to receive a significant infusion of capital. This will come mostly from official sources and will go largely to the government in support of the budget and of the various programmes and policies favoured by the donors.

Private capital flows needed by the entrepreneurial classes will only become available when the country becomes an attractive destination for the investors. For that to happen, the government will need to do a great deal of hard work. Some of this is needed to make the economy more competitive.

Last week, I used the latest report issued by the Islamabad-based Competitive Support Fund to point out the numerous weaknesses in the current structure of the economy. These had resulted in Pakistan slipping by nine places in the ranking of the countries on the competitive scale by the World Economic Forum. These weaknesses need to be removed in order to place the economy on a higher plane of growth and development.

One way of doing this is to bring to the economy the capacity to innovate. This is largely absent at the moment although, as the report points out, there are inherent advantages present which include a very young population . The median age of Pakistan’s population is 18.2 years – which means that tens of millions of young people are entering the workforce every year. Properly equipped with education and appropriate skills, they could lend enormous dynamism to the economy. Left alone to their devices they will only swell the ranks of the disgruntled.

The other advantage Pakistan has is the capacity to adapt new technologies and new ways of doing things when conditions are right. This was amply demonstrated in the late ‘sixties and the early ‘seventies when the farming community – in particular the medium sized farmers – quickly adopted the technology associated with high-yielding seeds developed in Mexico (wheat) and rice (the Philippines).

The government headed by President Ayub Khan had a great deal to do in facilitating the arrival of what came to be called the “green revolution”. The government – a different one – also had a great deal to do with the failure to bring another revolution which changed the agricultural economy of India. While New Delhi facilitated the adoption of biologically engineered cotton, the Bt, Islamabad discouraged it. The result was that India went from a cotton importing to a cotton exporting country while Pakistan moved in the opposite direction.

The importance economists have begun to place on innovation as a driver of growth and development is of relatively recent vintage. Development economics began its life as a separate discipline by suggesting that by the transfer of low productivity labour from the countryside to industry and modern commerce personal incomes would increase, markets would expand, and new opportunities would become available. All this would increase the rate of economic growth.

But the development of the modern sector needed more than the transfer of labour from less to more productive part of the economy. It also needed capital. This led to the development of production functions in which labour and capital were the two variables. It is only recently that economic model builders have introduced knowledge – and hence innovation – as a direct determinant of growth. This represents an enormous change in thinking which has not been fully factored in the work of economic policymakers. At this critical time in its history, the country certainly needs a lot of foreign capital. But to move towards an economic structure that will sustain high levels of growth, it also needs an economy that can innovate.

I will conclude with a quotation from The State of Pakistan’s Competitiveness Report, 2009, that very well summarises what the government could do to increase the rate of economic growth by focusing on innovation as an important contributor of change.

“Building a national innovation ecosystem for Pakistan is a complex and nuanced process containing many components. These include tax policies, government procurement, and protection of intellectual property rights.They include building the infrastructure for innovation and industry-university linkages. They include supporting entrepreneurs and businesses in general and in their technology identification and acquisition efforts. They include specialised support, such as business incubators and tech parks. They include strengthening education at all levels to encourage innovation and strengthening the ability of the financial sector to support commercially viable innovation. They include policies as straightforward as support for those wishing to file patents to more complex initiatives such as changing cultural attitudes towards risk.” This is a long and comprehensive list for what the government needs to do. However, as in so many other things it is not the dearth of advice that has prevented Pakistan from adopting the right course. It is the government’s poor capacity to implement what are the right sets of policies and initiatives. Whenever the United States government needs to take urgent and comprehensive action it appoints a “czar” to coordinate. More often than not this strategy has worked, most recently in restructuring the auto industry. The man given the responsibility did his job and has announced his intention to leave the government. Pakistan could perhaps do something similar in the area of innovation.

Ghulamhussain Tuesday, August 04, 2009 04:13 AM

[SIZE="5"][COLOR="DarkRed"][B]A new beginning?[/B][/COLOR][/SIZE]


[B][I][U]By Shahid Javed Burki[/U][/I][/B]
[B][I]Tuesday, 04 Aug, 2009[/I][/B]


THERE have been few such moments before — moments when the different countries in South Asia may have seen national and regional interests moving them in the same direction.

Such a moment may have arrived in the summer of 2009 when, with the establishment of democratically elected administrations in the three large countries of the South Asian mainland, the conflict-torn area may be able to work towards regional cooperation and eventually towards regional integration.

Governments responsive to the wishes of the citizenry are more likely to give more weight to economics than administrations dominated by the military. For a considerable part of their respective histories, Bangladesh and Pakistan were directly or indirectly ruled by their armies. Since the armed forces did not have to gain and retain power through elections they were not compelled to give economics — and, therefore, poverty alleviation and improvements in income distribution — much consideration in the way they governed. Sometimes the quest for legitimacy made the military governments adopt policies they believed would win them favour with their populations.

In the context of much of South Asia, the anti-India stance was such an approach. This was adopted with enthusiasm by the military-dominated countries. It was justified at least in the case of Pakistan by the belief that India still had not accepted the creation of a separate Muslim state as a legitimate aspiration of a large segment of the population of British India.

The other important development in the region was the realisation that religious extremism and the focus on ethnicity as a basis for nationhood posed a real threat to the long-term interests of the people of South Asia. While the Islamists are currently at the forefront of the use of violence against both the state and ordinary people to promote their interests and agendas, other religious extremists have also been active in the region.

The threatened encroachment of Hindu extremism on the Indian state was checked by the elections of April-May 2009 in India that unexpectedly gave a much larger margin of victory to the secular Congress party and to Manmohan Singh, the party’s candidate for premiership. This may prove to be a defining moment for the evolution of secular democracy in India.

The Pakistani elections of 2008 may also prove to be as much of a turning point in the history of South Asia. In Pakistan’s case, the military was shown the door and it is likely to stay out of politics unless something even more dramatic happens than the decision by Islamabad to use the military to defeat the extremists in the country. The Sri Lankan military’s triumph in the long struggle with the Tamil separatists and the support it received from the people is an indication that there is a limit to tolerance in the pursuit of ethnic rights.

With these and other events, South Asia may have begun to turn the corner, moving away from a total adherence to the pursuit of national interests even at the cost of doing damage to the region’s long-term prospects. Should the meeting at Sharm El Sheikh be viewed in this context?

If the short statement issued after the meeting is to be read as the shape of things to come, New Delhi seems to be correctly reading the change in the mood of the Pakistani population and the course the elected representatives wish to take.

Given Pakistan’s precarious economic situation and the strong desire of the people to have their economic problems urgently addressed, there is a growing sentiment in the country that a hard stance towards India will not yield any reward. On the other hand, it would further burden the economy that is already straining under many pressures. People are doing a cost-benefit analysis and seem to have concluded that the balance is in favour of a major improvement in relations with India. Unfortunately the same can’t be said about the sentiment in India.

It is in India’s interest to reach out to Pakistan and restart the process for solving some of the major issues it has with its neighbour. Without bringing a degree of tranquillity to the region, India’s ambition to be regarded as a major global power would be difficult to achieve. Its leadership must have realised that while Pakistan may have initially encouraged the jihadists to balance India’s enormous superiority in conventional arms, the strategy backfired. The Islamic extremists that once had the support of the state have turned on the state itself.

The human cost to Pakistan of this misadventure is a multiple of that borne by India because of the attacks for which responsibility has been assigned to these groups. Both countries would undoubtedly benefit if the persistent tensions between them were eased. By doing so they would be removing one of the causes the jihadists have espoused.

The Sharm El Sheikh pronouncement is a subject of extensive analysis on both sides of the border, particularly in India. Considerable attention has been given to it for two reasons: one, because Manmohan Singh agreed to delink the dialogue on the issues that have created mutual tension from Pakistan’s attempts to bring Islamic extremists under control; and two, because of the reference to Balochistan in the joint statement. Several serious Indian analysts have chided their prime minister on these two positions.

The fact that the Sharm El Sheikh meeting was on the sidelines of a summit that involved a large number of leaders from the developing world, points to an interesting — and disturbing — fact about the nature of the relationship between Islamabad and New Delhi. Such meetings should not be held on the sidelines of other meetings but should feature prominently and regularly between the leaders of the two countries.

Predator Monday, August 10, 2009 04:24 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Focusing on ethnic markets[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday 10, August 2009[/B]

THE government announced last month a policy for increasing the contribution trade makes to economic growth and poverty alleviation.
The policy was first approved by the federal cabinet and then announced by the commerce minister in late July with the support of the political masters who currently govern from Islamabad. This is, of course, a positive development since in the past trade policy was largely made by the bureaucracy with little political input.

I will concentrate on some of the issues that have not been touched upon by trade policy analysts. I will look at how the policy has presented the current situation, what is proposed to be done in the next three years and what are some of the omissions..

The commerce minister presented a somber picture of Pakistan’s situation in terms of its participation in international trade.The way the situation was analysed, it is clear that those behind the formulation of the policy are well aware of the changes that are taking place in both the system of international trade as well as in the system of international production. This was not always the case. I have argued for some time that the policymakers need to be fully informed of the economic environment in which they are operating before they can improve the situation.

The minister underscored the important but depressing point that Pakistan had gradually lost even the little bit of space it had in the international market place. Its share in international trade declined from a low of 0.21 per cent in 1999 to 0.13 per cent in 2009, a drop of almost 31 per cent. As against this, both China and India – the former more than the latter – have increased their shares. Why did this happen? The policy answered this question implicitly. Had it been more explicit about the reasons for the slippage, it would have focused more public policy attention on some of the areas that were not covered. I will get to this point later in the article.

The data presented in the policy document suggest that the country has done poorly in all the items of export which were the subject of much public policy attention in the past.While the value of exports declined by 6.8 per cent in 2009 compared to the year before, the declines were much sharper in the case of traditional exports. Textile exports declined by 9.4 per cent. Within this group there were some significant reductions: the value of export of readymade garments declined by 21.7 per cent, yarn by 15 per cent, and bed-linen by 10.2 per cent.

There are several reasons for these reductions including the severe global recession, particularly in the markets of the country’s main trading partners; increasing competition from other suppliers, particularly from China and India; and the concentration of exports in the items that are losing shares in international trade anyway. The conclusion from this brief analysis is that in order to have a dynamic export sector, Pakistan has to concentrate the attention of public policy on other sectors and items, those the trade policymakers usually refer to as non-traditional items.

Pakistan has done well in increasing the export of rice since it produces a variety – the basmati rice – that enjoys a large and expanding market.There is an important lesson in this for the policymakers. Market surveys have shown that even during periods of economic stress, the commodities and products that have appeal for the relatively well-to-do segments of the population continue to do well. Even those who can’t spend too much on luxury items, tend to economise on low quality and low price items than those of better quality and higher price. Basmati rice falls in this category. Pakistan, in other words, would do well to concentrate as much rice acreage as possible on growing this type of rice. But that is not all the country can do for this important export commodity.

There is anecdotal evidence to indicate that some of the packaged basmati rice that sells in the ethnic markets of the United States and Britain – the markets that cater to the needs of the people from South Asia – is produced by Indian exporters operating out of Dubai. They buy the Pakistani rice in bulk, package it in smaller lots, and then export it under their brand names. They thus capture the value added in this trade, leaving the Pakistani producers with relatively lower earnings.

The trade policy incorporates a number of financial incentives and proposes to establish a number of new institutions to push the export sector towards greater modernity and dynamism. It also promises to strengthen the government’s capacity to do analytical work in the area of trade. An effort will be made to understand the underlying dynamics of international trade and relate that to Pakistan’s potential in some of the products for which there is a growing market even in difficult times. One area where the government should concentrate some effort is on analysing the ethnic markets and de termine how these could be served by the producers in Pakistan.

I will illustrate this point with one other impression. I am presently working on a book at Singapore’s Institute of South Asian Studies.There is a large population of South Asian origin in this country which shops for ethnic products. However, my visits to many stores shows clearly that Pakistani products are mostly absent from the shelves. Has an effort ever been made to promote Pakistani products in this very rich market and introducing the retailers here to what the Pakistani producers and exporters could provide? If such an effort was made why hasn’t it produced results?

I will close with a brief reference to an item that is totally missing from the trade policy. I did not find any reference whatsoever to the South Asia Free Trade Area. Pakistan is one of the few countries around the world that has ignored the gravity model of trade in determining its trade policy. This model suggests that much would be gained by promoting trade with India. Given India’s tendency to be protective, it would be better if Pakistan does this in the context of a regional arrangement such as SAFTA. Why are we ignoring this arrangement as one way of increasing exports?

Predator Tuesday, August 11, 2009 08:33 AM

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

[B]By Shahid Javed Burki
Tuesday, 11 Aug, 2009[/B]

IN the article today I will discuss the role of the state in economic management and how this relates to the making of trade policy. It is important to develop this understanding in order to fully comprehend what the government is attempting to accomplish in the important area of international trade.

Economists since the days of Adam Smith and David Ricardo, the pioneers of the discipline, have believed in the rationality of the individual. They argued that each person behaves in a way that is in his or her own best interest. They also thought, naively it would now seem, that when these individual actions came together the larger interest of the community and society would be well served.

Some called it the social utility of greed. However, it took a while before economists journeyed from the micro to the macro, from the behaviour of individuals and firms to that of the entire economy. The term ‘macroeconomics’ first appeared in 1945. It was coined by Jacob Marschak to explain how national economies worked. Much of his work was based on that of John Maynard Keynes who, a decade earlier, had questioned the rationality assumption as applied to both individuals and markets.

But some of the work done by Keynes and his followers was forgotten once mathematics invaded the domain of economics. Rationality was easy to model mathematically; irrationality less so. This line of thinking and this way of doing economic work eventually led to the development of the ‘efficient markets hypothesis’ or the EMH in the jargon of economists. In 1978, Michael Jerden, the American economist boldly declared that “there is no other proposition in economics which has more solid empirical evidence supporting it than the EMH”.

An important byproduct of this way of theorising was the reduction of the role of the state in the making of economic policy. A belief developed that individuals, firms and markets should be left to their own devices, allowed to do what was best for them. What will result from this will be good not only for components of the economy but also for the economy as a whole. This was an attractive way of thinking and also elegant since it could be embedded in sophisticated economic models.

Such an approach was attractive for what I would call lazy governments — governments that did not have the intellectual equipment or political pressure to use public policy to guide the workings of firms and markets or the behaviour of individuals.

There were many areas of economic activity where the governments could and should have intervened but chose not to do so since economic theories supported a stand-off approach. Trade was one such area. Activist governments in East Asia took a deep interest in trade, in particular international trade, but lazy governments largely stayed away from this area. Some of these were in South Asia. Pakistan was one such country where the governments chose to do little to influence the content of exports and the direction in which they were sent.

But economies are like complicated living organisms. What happens in one part of the body can have a deep impact on other parts. Even weak and lazy governments make fiscal policy and what they do with the structure of taxes deeply affects the pattern of trade. Export promotion may not become an important objective of government policy but whether a country creates an important space for itself depends to some extent on fiscal policy. In East Asia, for instance, by combining tax policy with some direct interventions, the state was able to create an impressive amount of space in the global markets for domestic producers.

Some other areas of public policymaking also influenced the pattern of trade and its importance for the economy at large. Industrial policy was one such government endeavour that had important consequences for what a country did in international trade. Lazy governments produce lazy economic actors. It is easier to continue to support the established order through tax and industrial policies. Doing anything different meant exposing economic actors and governments to risk. Innovation can produce attractive returns for those who succeed and for the economy as a whole but the road to success is often paved with failures. This is one reason why lazy governments prefer the status quo.

If the state is to get actively involved in promoting trade what is it that should be done? A good trade policy has at least four components. It must be based on a good understanding of the international marketplace. There are profound changes occurring in the way countries trade, the products they produce and the relationships they develop with other nations. Understanding all this requires careful analysis and production of current data and information on many aspects of international trade.

Second, the state must be aware of what the economy is capable of producing. If there are opportunities available in the international marketplace, can they be successfully exploited by firms engaged in production and marketing? If there are major gaps between opportunities and capabilities what kind of tax and industrial and other policies could be adopted to bridge them?

Third, to be effective, the making of public policy must not be jerky. This means that the various actors in the economy must familiarise themselves with the public policy milieu in which they are operating. Once a broad framework has been established, changes in public policy must be at the margin.

Fourth, there should be broad public support for the approach being adopted. Economic policies work well when citizens have some say in their formulation, when they are understood by the citizenry and when citizens have the means to watch over their implementation.

The new trade policy has met some but not all of these objectives. I will return to this subject in a later article.

Predator Monday, August 17, 2009 02:07 PM

[B][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Rental power plants: a crisis-driven remedy[/FONT][/SIZE][/COLOR][/CENTER][/B]

[B]By Shahid Javed Burki
Monday 17, August 2009[/B]

TO dispel misapprehensions, government decisions need to be transparent as it closes the deals on rental power plants. These are floating barges that carry large generators which can be hooked into the distribution or transmission systems. They produce anywhere between 100 to 200 MW of power.
Policymakers have a tendency to act in the field of energy during periods of extreme crises when serious shortages appear. Shortages cause distress and considerable economic loss. They create space within which the government can act without heeding criticism.

The present crisis is perhaps the most serious the country has ever faced, even more serious than the one caused soon after the country’s independence by India. Then the Indians decided to switch off the supply of power on which Lahore, the country’s largest city depended. It caused a great deal of discomfort and some economic loss. Pakistan then was an agricultural economy and 90 per cent of its people lived in the countryside. Electricity did not reach most villages and few people depended on it to lead normal lives.

The government of the day reacted by formulating a strategy for developing domestic sources for the supply of power and to meet the demand of an economy that was expected to grow much more rapidly than the rate of GDP increase during the colonial times. Producing hydroelectricity was at the core of the government’s approach and resulted in the development of the site at Warsak on the Kabul River. A couple of power plants were also built at the canal heads in central Punjab.

The other power crisis was in the ‘nineties caused by the government’s failure to see that the economic growth of the ‘eighties will put pressure on electricity supply which was increasing much less rapidly than the increase in national output.

The government headed by Prime Minister Benazir Bhutto launched an ambitious programme to have power generated by the power sector. It provided generous incentives to a couple of dozen “independent power powers” which included the commitment to purchase whatever was produced at a pre-determined price. The result was electric.

Within couple of years, Pakistan from being a power-deficit, advanced to a power-surplus country. But that strategy left the country with a problem. Its dependence on imported fuel increased since most of the power plants used this form of input.

How should the government respond to the new crisis? It makes sense at this time to include rented power in the package of relief measures that need to be adopted to ease the shortage of power. But the resort to this source of supply has to be as temporary as the peoples’ use of small and highly inefficient generators to supply power to their houses, shops and places of work.

The important thing to watch is that the use of these stop-gap measures will not introduce serious distortions into the economy.That won’t happen with private generators; they will be switched off and stored away once the supply of power from the national grid becomes reliable. People are better at making choices based on a cost-benefit analysis. Governments generally do a poor job of factoring in such calculations in the making of public policy.

It makes sense as Dawn did in its editorial of August 10 by asking the government exactly how much it will pay for each kilowatt hour of power it purchases, how this supply will be switched off once cheaper power becomes available, and whether long-term assurances are being given to those who are entering the power rental business. If the purchase agreements are being done to last over a long period of time, the government will be seriously distorting the picture.

It should be understood though that depending on rented power is essentially a relief measure, not a longterm, not even a medium-term solution to the problem the country faces. As the Americans say, crisis provides an opportunity that must not be wasted; it should be used to put in place a well-thought out strategy.

Islamabad has some plans briefly reflected in the budget speech for 2009-10. But some careful work needs to be done and, using the parliament and provincial assemblies, once a strategy has been developed, it needs to be debated so that it has the backing of the people. The strategy must encompass a number of areas.

The most important of these, of course, is the choice of the source to be used for generating power. Since in recent years the energy sector was developed in response to crises, the country has not developed an energy sector that maximises the use of domestic resources while opting for the least-cost solutions.

In calculating costs, what appears attractive over the short-term may prove to be expensive over the longterm. This is why it is not prudent to rely on imported fuel as a major source of generating power. It has been known for a long time that Pakistan has the capacity to produce very large amounts of power using its rivers and canals. Several estimates put the potential at between 40,000 and 50,000 MW. What has prevented the exploitation of this resource is the inability of successive governments to satisfy all the provinces that a fair deal can be worked out.

Working on one project at a time in this context is not a good strategy since it creates winners and losers whose interests cannot be balanced. A multi-project framework is needed to settle the differences among the varied interests of the provinces. A strategy aimed at developing the full potential of hydroelectricity needs to be worked out and placed before the representatives of the people for discussion and approval.

Coal is the second mostly untapped source of electric power. Since what is available in the extensive deposits in Sindh and Balochistan is said to be of low quality and since, given the increasing concerns about global warming, coal is losing its popularity as source for power, once again a well-developed strategy is required.

What I am arguing is for the government to apply itself seriously to develop a plan that would shift the focus to the long-term and increase the country’s reliance on domestic sources of energy. Crisis solving should not be the basis for finding a viable long-term solution.

Predator Tuesday, August 18, 2009 10:07 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Task of implementation[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 18 Aug, 2009[/B]

WHAT I am writing today is based on personal observations as well as what I have heard from some people. One of the most important problems the country faces today is the inability of the state to provide to the people what they need.

The government seems to know what it should do but seems unable to act; it appears stuck in a groove from which it is finding difficult to get out. Implementation is currently the government’s greatest challenge. I will illustrate this point with three examples.

Let me begin with a personal observation. A few weeks ago my wife and I, having spent two weeks in Pakistan, returned to Singapore to continue work on a book I am writing for the Institute of South Asian studies. We were travelling on a Singapore Airlines flight from Lahore to Singapore.

Our time of departure coincided with that of a couple of other flights destined for a couple of points in the Middle East. I would have thought that handling a few flights within an hour or so should not tax the capacity of a relatively new and modern airport. But that did not turn out to be the case. From the moment we were dropped outside the main verandah of the departure lounge to the point when we reached the sparsely appointed upper class lounge we were in the midst of enormous chaos and confusion.

There were no porters available to help us with our bags so we put them in a trolley and began to move towards the entrance gate manned by half a dozen security officials. It took us an hour to negotiate the few metres of space. Where there should have been one line there were five. Where there should have been only passengers in between the railings that were supposed to regulate those entering the departure area, there was a generous mixture of passengers and those who had come to say goodbye. To say that there was a great deal of shoving and pushing is not to adequately represent the mayhem through which we went.

When we finally got to the point of entry, I asked one of the security personnel why he was just standing there looking bemused. His response was simple and illustrative of the situation that travellers must confront daily. “Yeh dande ki qaum hai,” he said to me and turned his face away indicating that there was nothing more to say or do.

What would it take to sort this situation? A simple but robustly enforced requirement that only passengers will be allowed in between the rails, that they will form one line not several, and that they will not enter the queue wherever they saw a bit of opening would suffice. I am sure one security guard could enforce these simple rules but it would require somebody in authority to ensure that they were observed.

Once lined up in front of the airline desk to get our boarding passes I encountered the same lack of respect for the queue discipline. It was obviously a part of our evolving culture. There was one difference though. This time the airline official was watching the show from behind his counter, refusing to serve those who in his view had beaten the line. This did not particularly please those who had taken the trouble to plough their way to the front.

My second example of governance having gone awry comes from the conversation I had with a senior person of the World Health Organisation who said that in spite of the efforts made by his organisation to have Pakistan prepare itself for the flu epidemic that could take a nasty turn any time, there was no sense of urgency in Islamabad. Several meetings had been held with the health officials but the recommended strategy had not been put in place. According to him Pakistan ranks 139th out of 140 countries in terms of preparedness.

I draw the third example from the work I am doing at the government’s behest on the involvement of the private sector in the development of the economy. At one of our meetings a senior textile mill owner said that he was able to compete with any producer around the globe for the specialised fabrics he produces. In fact 90 per cent of his output went to some of the most demanding buyers. He was required to meet a number of conditions — that the water he used was cycled back into his operations, that his workers were properly housed, and since he employs a large contingent of women, that he provided their children with appropriate education on site. In spite of these requirements, he is able to beat competition.

However, he has a much more difficult time dealing with the small firms who compete with him in the domestic markets. “They don’t pay taxes, steal electricity and water, don’t observe labour laws and have no regard for intellectual property rights,” he complains.

The last point is particularly significant for him. He has a world class design centre but the designs the centre produces for his products get copied within a week and hit the markets soon after he has put out his own. His main plea to us is to persuade the government to ensure that there is a level playing field for all producers, big, small and those in between.

The three examples I have taken from three very different fields point in the same direction. There is a growing disregard in the country for carrying out assigned duties. Security personnel have no interest in ensuring discipline, the private sector is looking for ways to beat the system and government functionaries are casual when it comes to serving the people. What is at the bottom of all this? Perhaps a tolerant culture and an educational system that doesn’t instill in the people the difference between rights and duties.

Predator Monday, August 24, 2009 01:25 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Govt intervention and competence[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday 24, August 2009[/B]

ECONOMISTS have once again turned their attention to the role of the state in managing not only the macro but also the micro economy.
The state should not only be involved in minding the fiscal and monetary policies but can – in fact should – take over firms and the entire sectors of the economy whose demise could seriously hurt the national economy.

It took a major economic crisis in the West to recognise that the state could not be shoved on to the back burner. President Ronald Reagan’s statement a couple of decades ago that government was not the solution to economic problems but the problem itself seems so out of place now. That point of view was shared by Prime Minister Margaret Thatcher of Britain and the two working together were able to put in place an entirely different set of policies aimed at managing the economies not only in the developed but also in the developing parts of the world.

These sentiments led to the formulation of sets of policies that together came to be called The Washington Consensus. They represented a consensus among a bunch of economists who were worked at a number of economic and financial institutions based in Washington. The policies the Consensus promoted touched upon two things in particular. One, the state should leave most economic decision-making in the hands of the private sector. Even the regulatory aspect of economic management should be handled by the state as the last resort. It was in the interest of the private sector to regulate itself. If it did not, it will lose the respect of the market place and suffer economically.

Second, the economies should be open to the world outside. Movement of trade and capital should be as free as possible. The state should not be allowed to place obstacles in the way of these flows. The same theory should have been applied to the movement of people. But here an exception was made. The owners of most capital and a significant proportion of tradable products were the world’s richer countries. It suited them to advance the view that capital and tradable products should go to the markets where they fetched the highest return. This would increase general welfare and everybody would benefit Exactly the same logic should have been applied to the movement of people. However, since the bulk of the world’s people lived in poor countries, the world’s richer countries had no problem in deviating from the philosophy of openness that was being sold in the case of other types of flows. As the world became increasingly open in trade and capital flows, more and more constraints were applied to the movement of people.

The deep economic malaise that began in August 2007 in the United States and quickly engulfed the rest of the world, brought the state back to the front burner. The state is no longer seen as the problem; it has become the solution. America had gone the furthest in expelling the state from economic matters. Now reversing the course, it is the most aggressive in bringing the state back. President Barack Obama has succeeded in getting the state involved in recapitalising the financial sector.

Without public money going into the banks, credit would have remained frozen and the economic slump deeper. The American government also rescued the automobile industry from going out of business. Washington is now the largest share holder in General Motors, its largest automobile company.

Now the state is being used all over the world to save the private sector from its greed. Governments have poured extraordinarily large amounts of money to save their economies from slowing down and bringing with it increased unemployment. This has been done not only in the countries such as the United States and Britain that were at forefront of the earlier thinking on economic matters. It is also being done in several large emerging economies.

China showed great boldness in pumping large amounts of public money in building infrastructural projects so that more people will not lose jobs. India, although with a large fiscal deficit to manage, it also used a stimulus package to keep the economy growing at a pace needed to keep more people going into the already large pool of poverty. Indians are also using public finance to provide support to the people who can’t find work in the private sector.

Even before the Indian state got involved in helping the economy maintaining the rate of growth at a reasonable level, it was active in saving the collapse of Satyam, one of its largest IT companies. The state took over the company temporarily and then engineered its sale to another company engaged in the same business. This intervention helped to save the reputation of the IT sector on which so much of the Indian economy depends, particularly for bringing large amounts of exports and for also attracting foreign direct investment.

But Pakistan has not taken this route of active state participation in economic revival. To the multilateral financial and development institutions and bilateral donors that are involved in helping Pakistan navigate its way out of the current economic crisis, it is clear that the state is much too weak to handle some of the tasks that are being done by it in other parts of the world.

The Pakistani state in its present form can’t be trusted to handle the distressed economy. It is clear that Islamabad needs to focus on its present economic difficulties and prepare for the future. Why is the state weaker than is the case with the state in other countries at the same stage of development? The answer comes from a careful study of the country’s economic history which is beyond the scope of this article.

The state is exceptionally weak for the reason that it has seen so many different hands that have guided it in the past 60 years. Work on rebuilding it has to be given a very high priority now that a new political structure has begun to take shape. The work should start immediately.


02:07 PM (GMT +5)

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