[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Democracy & development[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]Some economists suggest a threshold that must be crossed before conditions necessary for the success of democracy can be met. They place the threshold at about $6,000 per capita income.[/CENTER][/I][/B]

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

IS democracy good for economic development or does it hinder it? The debate goes on. India has certainly been helped by it in recent decades. Pakistan has done poorly since its return to what the Washington-based lobby group, the Freedom House, labels a “limited form” of democracy.
Those who have studied the miracle economies of East Asia and their extraordinary economic performance over the last three decades defend the model pursued by that region according to which economic development naturally precedes democracy.

Most East Asians turned towards democracy after achieving economic progress. Some economists suggest that there is a threshold that needs to be crossed before all the conditions considered necessary for the success of democracy can be met. They place the thresh old at about $6,000 per capita income.

Lee Kuan Yew, the founding father of modern Singapore, once asserted that democracy leads to “disorderly conduct” that disrupts material progress. The is land state has been slow to loosen the control of the one predominant political party on the tightly run political system. The country is now one of the richest in the world.

China’s economic success in the last quarter of a century, which is as remarkable as that of the East Asian miracle economies, has created the case for a tight grip on political power in order to create a dynamic economy. China’s ability to pull out of the recession of 2008-09 while the established democracies of the West are still struggling is considered further evidence of the need to follow a sequential approach: of allowing the economy to take off before attempting to bring in democracy. The Chinese approach is being followed by other countries in East Asia, particularly Vietnam. China may, therefore, be one reason why the drive towards establishing democratic systems has slackened in the world.

America’s experience in Iraq and Afghanistan, where it launched military operations in part to bring in liberal democracy, has not helped advance that particular cause in the developing world. Repeated elections in Iraq have not created a representative system of governance in which all segments of a very diverse population have full confidence.

While Iraq has made some advance, Afghanistan remains way behind. The Americans have concluded that the best way of departing from that country is to negotiate with the Taliban, a group that has no interest in the western style of governance.

In the 2010 report, Freedom House found that declines in liberty occurred in 40 countries (in Africa, Latin America, the Middle East and the ex-Soviet Union) while gains were recorded in 16. Liberty and human rights had retreated globally for the fourth consecutive year. The organisation said that this marked the longest period of decline in freedom since it began publishing its reports nearly 40 years ago.

Freedom House classifies countries as ‘free’, ‘partly free’ or ‘not free’ by using a range of indicators that reflect its belief that political liberty and human rights are interlinked. As well as the fairness of their electoral systems, countries are assessed on issues like the integrity of their judges and the independence of their trade unions.

According to The Economist, that in January 2010 wrote a long article on democracy’s decline using Freedom House findings, there was “a huge turn for the worse since the bubbly mood of 20 years ago, when the collapse of Soviet communism, plus the fall of apartheid, convinced people that liberal democracy had prevailed for good. To thinkers like Francis Fukuyama, this was the time when it became evident that political freedom, underpinned by economic freedom, marked the ultimate state in human society’s development: ‘the end of history’, at least in a moral sense.” Both Russia and South Africa became ‘free’ for some time by the reckoning of Freedom House. In 2009, Russia went back to the ‘not free’ category.

To quote from The Economist again, “for freedom watchers in the West, the worrying thing is that the cause of liberal democracy is not merely suffering political reverses, it is also in intellectual retreat. Semi-free countries, uncertain which direction to take, seem less convinced that the liberal path is the way to the future. And in the West, opinion-makers are quicker to acknowledge democracy’s drawbacks — and the apparent fact that contested elections do more harm than good when other conditions for a well-functioning system are absent.” According to Freedom House, the number of electoral democracies went down by three, to 116 in 2009. This left the total at its lowest level since 1995, although it is still comfortably above the figure of 69 in 1990. Then, even though Gen Zia was no longer holding Pakistan in his tight grip, having been killed in an air crash in August 1988, Freedom House still classified the country as ‘not free’.

Pakistan provides a good illustration in support of the following position: that elections alone don’t qualify a political system as a democracy. A more nuanced argument against the promotion of electoral democracy has been made by several analysts, most notably Fareed Zakaria and Paul Collier. They have argued that democracy cannot take hold in the absence of several pre-conditions that ultimately assure its success.

It is evident from Pakistan’s case that the legal and judicial systems are still playing catch-up with the election-based political structure. There is an ongoing con frontation between the government’s executive and legislative branches on the one side and the judicial system on the other side. The latter is still attempting to instil respect for itself among the ranks of those who dominate the other two branches. The former is not prepared to have its freedom constrained by the niceties of established law.

How should the debate be settled? Extending the universe to be studied beyond East Asia helps to conclude in favour of democracy. A study by Morton Halperin, Joseph Siegle and Michael Weinstein using World Bank data between 1960 and 2001, found that the average annual economic growth rate was 2.3 per cent for democracies and 1.6 per cent for autocracies. Those looking for more evidence point out that a climate of freedom is most needed in knowledge-based economies, the state towards which most successful countries are moving.

It is no accident that that every economy at the top of the Global Innovation Index is a democracy with the exception of Singapore and Hong Kong. China comes in 27th. Given all this evidence Pakistan should not be tempted to return to the controlled systems it has tried in earlier times.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Making the railways work[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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

THE Great Flood of 2010 not only killed a couple of thousand people, displaced millions of poor, also killed hundreds of thousands of animals on which the poor depend to generate some additional income, and laid waste to millions of acres of land. It caused an estimated damage of $10 billion to economic assets and will reduce the GDP increase by as much as one percentage point a year for several years to come.

The floods also exposed a number of weaknesses in the way Pakistan has been governed and the way it has managed its economy. Among these is the pitiful neglect of infrastructure that was built at great expense by the British rulers and from which the country could have drawn great benefit only if it had looked after what it inherited. In the days following the floods there was some commentary on the neglect of the system of irrigation but hardly any mention was made of the deterioration that has been allowed in the system of railways over the last many decades.

There are several reasons why successive administrations that have governed Pakistan since its creation allowed the well developed railway system to quite literally rot. One of these is the political power that was wielded by the rich who did not have to respond to the needs of the poor. The poor couldn’t afford air travel, didn’t have cars to use the roads whose development fared better than the railways in terms of the attention given by the state, and the state did not have the resources to invest in infrastructure.

Could this trend be reversed? The answer is “yes” but it will need those who rule to recognise that railways even now perform a major function in helping economies function and grow. Dozens of countries around the globe, both developed and developing, are heavily investing in improving the railways systems. Pakistan is not one f them.

A recent book by Christian Wolmar, a historian of railways, provides an overview of how the various large systems in the world were built and how they have contributed to economic advance. Railways, he maintains were the driving force behind the first age of globalisation in the nineteenth century. “Railroads let Kansas wheat farmers feed Manchester workers, and Indian cotton growers clothe Brazilian peasants. Railways drew those Irish and Chinese immigrants to America, and their counterparts from other countries to construction projects around the world.

Railroad-building enticed capital from developed to developing economies of the United States, India and elsewhere. Trains allowed people who might never have travelled more than 100 miles from their places of birth to roam around continents in comparative ease.” Railways, in other words, encouraged the movement of goods, commodities, people and capital to go to places where they would never have gone had the cost and pain of travel not been eased by them.

There are a number of management systems that have been tried in various parts of the world. In the United States, the business is almost entirely in the hands of the private sector in so far as inter-city transport is concerned. It is only the systems that run in the cities that the ownership is in public hands. In continental Europe the system combines government ownership with construction and maintenance largely in the hands of the private sector. This management model has given rise to large manufacturing companies that have dominated the sector before the recent arrival of the Chinese..

That the use of the management model can have profound – sometimes negative—consequences for the development of the railway system is demonstrated by the way the privatisation of the British system affected is efficiency. The impact of splitting up track from signalling, development from maintenance, management from coordination played havoc with the system.Today Britain is decades behind Continental Europe in terms of the efficiency of its railways.

The business of railways is changing and in dealing with the sector, Pakistan being a late starter in modernising the system, could possibly leap-frog into the future. There are a number of management systems that have been tried various systems of the world to improve railway transportation. In the United States, the business is almost entirely in the hands of the private sector in so far as the inter-city transport is concerned. It is only the systems that run in the cities that the ownership is in public hands.

That is largely because the operations are highly subsidised though taxes. In the Continental Europe, the systems combine government ownership with constuction, expansion and maintenance is largely in hands of the private sector. This form of management has given rise to large manufacturing companies that have dominated the system before the arrival of the Chinese companies on the railway scene – subject to which I will return later in the article.

It is the system of railway management in Europe that gave rise to equipment manufacture, track construction and maintenance behemoths such as Germany’s Siemens, United States’ General Electric, Japan’s Kawasaki, France’s Alstom and Canada’s Bombardier.

The Chinese have now entered the business of railways in a big way. Earlier this year China’s Xinhua news agency published a long article explaining how the country had “achieved 40 years of high speed railway development in just five years.” According to one analyst, the Xinhua “document should be read by all manufacturers doing business in China, a reminder that they are dealing with a nation that is no longer willing to be technology follower and is able to use the allure of its vast market to catch-up”.

As China did in several other sectors including coal and nuclear power generation and manufacture of automobiles it has granted access to its enormous market by insisting on the transfer of technology. It has managed to develop its railway industry to the point at which it was able to out-compete the established systems in Europe and North America in winning the contract to build a high speed line connecting Mecca with Medina.

India is also making impressive strides in the railway sector. The underground system in Delhi has won the admiration of many foreign experts for its engineering as well as management. The inter-city system is being modernised in terms of both the quality of service on offer as well as the new equipment being used.

The Indian and Chinese systems are by far the largest in the world and the two countries as a result of the advances they are making will come to dominate the world railway industry and business. Pakistan being a neighbour of these two rapidly growing and giant economies could benefit enormously from the development of the two systems.

Pakistan needs to move quickly and ambitiously in at least three areas. It should modernise the system by improving the track and increasing the speed at which the trains travel. It should use the railway system to provide mass transport in the major cities. And it should link its system initially with those of China and India but eventually also with those of Afghanistan and Iran. That way Pakistan will be able to make good use of its geographic situation.

As I have suggested on many occasions before, giving India the transit rights to Afghanistan, China, and Iran could yield enormous economic benefits to Pakistan. Such a programme will require large resources to be implemented but these should be available not only from the donor community but also through the international bond markets. As Wolmar describes in the work cited above, some of the major railway networks were built by tapping the international financial markets.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The middle-class millions[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]Pakistan’s liberal, educated and modern middle class can be counted upon to resist any attempt by conservatives to take over the country and its institutions[/CENTER][/I][/B].

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

AN earlier article on these pages has led to a controversy among some who are paid by their think tanks to worry about Pakistan; where it is today and where it might go in the future.
In the article I suggested that there were tens of millions of people in Pakistan — mostly in the urban areas — who constituted the expanding middle class. I put a number on my estimate. I suggested the average income of the middle class and its size in Pakistan suggested that there was a middle-income segment embedded in the country’s population.

I went on to suggest that the value system and aspirations of the people belonging to this group of people were not very different from the middle classes in other parts of the world. They were more liberal and less religious, more educated and more open to modernisation than the more conservative elements in the society. They could, therefore, be counted upon to resist the attempt by conservatives to take over the country and its institutions.

It was this conclusion that drew the attention of some academics and policy analysts in the West — in particular the US — to my estimates and to my argument. Those who objected were also those who believed that Pakistan was moving along a path from which it could not be rescued; that a takeover of the country by the extremists was inevitable; that Pakistan’s arsenal of nuclear weapons would inevitably fall into the hands of terrorists and thus equipped, some people from Pakistan would attempt to create havoc in the West much worse than 9/11.

Some of my Pakistani colleagues who were present when my findings were discussed in some of these seminars suggested that I should buttress my argument by making clear the methodology I had used to derive the numbers I had presented in the article. I told my friends that my method was simple. I had assumed that one could separate the top 10 per cent of the population in terms of the in come distribution as rich or well-to do and the bottom 60 per cent as poor or under great economic stress. The remaining 30 per cent of the population could be said to constitute the middle class. If Pakistan today has a population of 175 million people, then those in the middle class numbered 52.5 million. This was a simple enough calculation.

What made my estimates interesting was not the number of people belonging to this class but their average income. To calculate that I used the World Bank’s income distribution data from its World Development Indicators tables. These tables tell us that the top 10 per cent of the population had a combined income of $43.2bn or a per capita income of $2,450 in 2008. This group accounted for 43.2 per cent of the national income.

The bottom 60 per cent of the population received only 22 per cent of the national income. This meant income per head of this group at only $340, or less than one-seventh that of the rich. The residual $83.75bn accrued to the middle class. This class had income per head of $1,600. Their share in the national income was 34.8 per cent and their per capita income was 72 per cent of the average for the country.

It is, of course, quite arbitrary to classify 30 per cent of the population as belonging to the middle class. If we assume that their proportion is 20 per cent of the population this would still give us 35 million people belonging to this category. This revised estimate would increase the per capita income of this segment of the population to $1,900 or their combined total to $66.5bn or 40.8 per cent of the total. If we say that a typical middle-class family has five members, it is safe to assume that seven to 10 million households belong to this category.

The point of this exercise is to indicate that Pakistan has a large number of people with a middle-class income and with a middle-class pattern of consumption. They spend a large amount of their total incomes on services such as education, health and entertainment. A significant proportion of the households in this category have their members living and working abroad.

According to one estimate, there are about 800,000 people of Pakistani origin in North America. This would suggest that some one-tenth of households in the upper income group — the rich, the well-to-do and the middle class — have some exposure to this part of the world. Notwithstanding the case of Faisal Shahzad, the US citizen of Pakistani origin who was recently sentenced by an American court to life im prisonment for attempting to set off a bomb in New York City, I can’t imagine that the exposure of such a large number of households to North America would not have some liberalising influence.

That a large middle class has begun to flex its politi cal muscle was shown by what has come to be called the lawyers movement that resulted in the restoration of judges fired by former president Pervez Musharraf. It is this social and economic class that is supplying both audience and talent to the electronic media that is displaying an extraordinary amount of independence in commenting on and analysing national and international affairs.

This class is committed to a representative form of government and would also like to see the policymakers deliver clean and effective governance. It is unlikely that it would countenance an attack on either of these goals from any quarter, from the establishment or from religious zealots. This is one reason why, in spite of all the misgivings expressed about Pakistan’s political, economic and social future, I remain confident that we will see the country successfully muddle through the present sets of crises and continue to move towards a democratic form of government.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Using trade to grow and develop[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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


AN open trading system helps to increase the rate of economic growth and the pace of development. It is always helpful to distinguish between growth and development since the former concept does not fully capture the benefits that should accrue when the national income increases.
The rewards from increments to national income should be distributed as widely as possible not only among different segments of the population but should also reach the country’s more backward regions.

Empirical evidence gathered and analysed by development institutions such as the World Bank and the Asian Development Bank suggests that open trading systems also aid in the alleviation of poverty and the development of backward regions.

For a number of decades after most of the countries that achieved independence from colonial rule, the received economic wisdom was that it was better to participate in international trade after a certain amount of industrialisation had been achieved.

Some of the earlier thinkers from the developing world, most notably the Argentinean economist Raul Prebisch, had concluded that open trade would beep what they called the world’s periphery backward since the world’s industrial cores would use their economic muscle to put a downward pressure on the prices of the commodities exported by the developing world.

This would lead to the transfer of wealth from the periphery to the centre keeping the former permanently dependent on the latter. This came to be called the “dependency theory”.

This theory was applied rigorously by the countries of Latin America and South Asia; in the case of the latter for four decades after the countries in the region had gained independence from British rule. Jawaharlal Nehru, India’s first prime minister who ruled the country for 17 uninterrupted years, was the most articulate exponent of this theory. He exercised his influence through the Non-Aligned Movement he dominated to influence the international trading system as it was evolving after the Second World War.

The NAM countries were able to get the right to protect most of their industries under the “infant industry” argument according to which sometime was needed to allow the manufacturing enterprises in the developing world to mature before they faced competition from the more developed industries in rich countries.

Once again empiricism came to the help of economic theory. When the remarkable economic performance of some of the countries of East Asia was studied by the World Bank in the mid-nineties, it concluded that international trade was the real driver of growth of the “miracle economies”.

Using industrial policy, these countries were able to develop a manufacturing sector that was able to compete successfully with the more established industries in the developed world. A wide range of products were exported; they included not just cheap labour merchandise such as ready-made garments but also such highly engineered items as ships and eventually automobiles. This became possible because these countries oper ated relatively open trading systems.

It was only in the mid-eighties – more fully in the early nineties – that the countries in South Asia began to change their policy stance. They began to open their economies with Pakistan taking the lead under the financial stewardship of Sartaj Aziz who was then the minister of finance.

India under its finance minister Manmohan Singh followed even more aggressively. New Delhi dismantled what had come to be called the “license raj” and thus unshackled the economy which had kept the private sector under a very tight control of the government.

Even with more openness, the South Asians have not used international trade as the engine of growth and development to the extent done first by the miracle economies of East Asia and later by China. In terms of the making of public policy in the region two issues remain unresolved: what approach to use in opening the economy to the world outside and how to encourage exports.

Economists have debated for some time different approaches to openness. Three of these have been put forward. The purists believe in what is termed as the “unilateral approach”. This is done by lowering the barriers to trade without waiting for reciprocity from the trading partners. This is what the East Asians had done to some extent.

If they constrained imports it was more by way of the exchange rate policy. Domestic currencies were kept seriously undervalued which meant that foreign goods remained expensive in the domestic market while the products produced by domestic industry became internationally competitive.

China, to the consternation of the United States, continues to follow this approach. The second approach is to let openness come through changes in the multilateral trading system. This is the favoured view on the part of those who believe in reciprocity. This is what guided the series of multilateral trading rounds that have established the rule-bound international trading system. The latest of these – the Uruguay Round – was concluded in 1995 with the signing of the treaty at Marrakesh in Morocco that led to the establishment of the World Trade Organisation. Another round was initiated at Doha in November 2001 the specific purpose of which was to address the problems the developing world faced in the new system.

The most important of these was the restricted trade in agriculture as a result of the extensive support provided by the governments in the United States, Europe and Japan. The various kinds of subsidies by the state to the small number of people who continued to draw their living from agriculture in the developed world meant loss of great deal of income for the millions of poor farmers in developing countries.

How to produce a level playing field in the sector of global agriculture became the central issue in the Doha Round. The round remains stalled because of the differences between developed and developing countries.

The third approach to opening to the outside world has resulted in the signing of free trade agreements (FTAs) between trading partners or among countries in well defined regions (RTAs). The South Asians have tried both mechanisms. Pakistan, for instance, has free trading agreements with China and Sri Lanka and is also the member of the South Asia Free Trade Area.

The Safta was signed in January 2004 at the summit of the sevenmember South Asian Association of Regional Cooperation and was launched two years later in 2006. Pakistan was the last country to ratify the agreement. Since the launch of the SAFTA, Afghanistan was admitted as the eight member of the Saarc.

The Safta has not delivered what was expected from it. There has been only a marginal increase in the value of regional trade in part because the attention of India and Pakistan has remained diverted towards other places – India’s towards East Asia and Pakistan towards the United States and Europe.

Pakistan has heavily invested its political capital in gaining access for its traditional products in the American and European markets. The products whose access it has sought belong mostly to the textile group where there is increasing competition from the countries that have even lower wages than Pakistan.

This strategy has delivered some limited results: the Europeans have agreed to grant access to a limited set of textile manufactures for a short period of time. The Americans may do the same. I believe this approach is wrong. It may provide temporary relief to the highly stressed textile industry but it will only serve to prolong the distortions in the industry that have created problems in the first place.

International trade will not become an engine of Pakistan’s economic growth and development for as long as it does not concentrate on developing markets nearer home and promote the production of goods and commodities that have a better future than textiles in the international market place.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]History must not lie[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][CENTER]The Pakistan movement may have used the idiom of Islam to draw mass support. But the objective was to secure a better economic future for the Muslims of India, not to create an Islamic entity.[/CENTER][/B]

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

EVER since gaining independ ence Pakistan has done a re markable job of either ignoring its history or simply not telling the truth about it. The first is true for economic history, the second for the part of history that concerns the country’s polit ical evolution.
In a well-known work Khursheed Kamal Aziz — or simply KK as he was known to his friends and admirers — wrote about the series of lies and distor tions that crept into the writing of histo ry. In The Murder of History, one of his last works, he confessed that he was also guilty of committing this crime.

In the officially sponsored The Making of Pakistan which for many years remained the definitive account of the founding of Pakistan as a separate state for the Muslim community of British India, Aziz gave greater prominence to Muslim na tionalism as the reason for the creation of Pakistan than suggested by the facts.

This line of argument was pursued in a number of works by several other political historians who followed Aziz’s work. They identified religion as the motivating factor behind the movement for the creation of Pakistan. The question of why a segment of the Muslim population of British India came to believe that separation from the Indian mainland was the only way to protect their interests acquired importance in the writings on the founding of Pakistan. Increasingly, the answer came to be provided in religious terms.

This interpretation of history is not only wrong, it is also dangerous. What we are seeing now in terms of the rise of extremist Islam in the country can be attributed to this line of thinking. This approach to history has also resulted in casting ‘Hindu’ India as the eternal enemy. I have advisedly put the word ‘Hindu’ in quotation marks since India is not by any stretch of the imagination a Hindu state. It is a secular state that de fines itself as such in the constitution it has followed carefully and dutifully. It is no doubt a Hindu-majority country but has permitted all religious communities to exercise their rights according to the law of the land.

Distorting the Indian political entity has already done considerable mischief and has influenced Pakistan’s relations with its large neighbour. As Raza Aslan, the young Islamic Iranian-American scholar of some repute has emphasised in his recent book, How to Win a Cosmic War, conflict based on ideologies can only be waged if the enemy can be defined as the ‘other’ — an entity, political or otherwise, against which a struggle must be waged no matter what the cost.

These conflicts become dangerous, prolonged and unending when both sides take recourse to a higher being. This is what Al Qaeda has done globally and what various Islamic groups are doing in Pakistan at this time. For the first the Christians, Jews and what it calls the “crusaders” constitute the ‘other’. For some of the Pakistani groups India has been cast in that role.

This approach has done an enormous amount of damage to Pakistan. As Raza Rumi recently wrote in a weekly newspaper devoting considerable space to K.K. Aziz’s work, the writing of history was brutalised during the Zia era. “Pakistan’s military-bureaucracy complex reinvented an ideological state based on a sectarian world view; history was an instrument propagating this ideology; and the jihad factories were flourishing. Jinnah’s Pakistan was irreversibly shattered and perhaps destroyed. For K.K. Aziz’s generation this was nothing short of betrayal.” As I have written in several of my own works, the Pakistan movement may have used the idiom of Islam as a way of drawing mass support; it was not a movement for creating an Islamic entity but an attempt to secure a better economic future for the Muslims of British India. This is why there was a paradox in the way the movement achieved its ultimate objective — the creation of Pakistan.

The movement was led by a group of people who belonged to the Muslim minority areas of British India and who felt that their economic future would be threatened in a state in which the Hindu majority would rule. However, they created a state in the part of British India in which Muslims constituted a large majority and felt secure about their economic future even after the departure of the British from India. It was for this reason that Punjab and the Frontier were at best lukewarm to the idea of Pakistan. But once Pakistan came into being these two elements coalesced to define a view in which the economic betterment of the citizenry was the main goal to be pursued.

However, then Islamists under Gen Ziaul Haq entered the picture and began to distort the original idea of Pakistan. Mohammad Ali Jinnah’s famous words uttered as he was preparing to launch the new state of Pakistan — “You are free. You are free to go to your temples, you are free to go to your mosques or to any other place of worship in this state of Pakistan. You may belong to any religion, caste or creed — that has nothing to do with the business of the state” — meant nothing to these ideologues. They got busy in rewriting the meaning of the idea of Pakistan.

The inherent conflict between the two ideas of Pakistan remains unresolved. What is it that we want to create in what is now the second largest country in the Muslim world? Do we want a state ordered according to the ‘principles of Islam’ whatever that term implies or to improve the economic and social circumstances of the country’s citizens? There is enough evidence around to suggest that it was the latter objective that was in the minds of the founders of the country. It is that objective that we need to follow.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Knowledge as a driver of growth [/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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

ECONOMISTS have moved away from their belief that growth is mostly the consequence of the application of capital and the use of surplus labour. Emphasis on labour and capital as the main determinants of economic growth was the foundation of development and growth economics.
It was this way of looking at growth that convinced early policymakers to concentrate on raising capital for investment. If capital could not be generated from within the economy by increasing domestic savings rates – these were low in most of the developing world half a century ago – then serious efforts should be made to get it from abroad.

The latter approach was followed by Pakistan throughout its history. This dependence on foreign money meant that Pakistan has had to accommodate the interests of those countries and institutions that were prepared to finance its growth.

Protracted discussions with the IMF in recent months are one example of the kind of pressures the country comes under because of the reliance on external finance.

As experience was gained in development and growth and as more data became available to recognise and quantify the drivers of growth, economic thinking deepened.

There is now consensus among economists that a number of other contributors to growth are also important – some of them are vital if growth is to be sustained over a period of time. Among them are technology, the capacity to innovate and the levels of skills obtained by the workforce. These three elements are usually lumped together and called “knowledge”.

Some of the pioneering work in this area was done at the World Bank which in 1996 devoted its World Development Report to this important subject. Since then the institution has gathered more data, including from the countries in South Asia, to study how the application of knowledge advances the rates of economic growth and what are the various areas of policy on which the governments should act.

In the process the bank developed a useful tool for benchmarking to determine how countries across the globe were doing in terms of using knowledge to grow their economies. The knowledge economy index, or KEI, was developed which highlights how countries are performing in relation to others.

The bank’s findings indicate that South Asia as a region and Pakistan within this region have done particularly poorly with respect to KEI. Two conclusions can be drawn from this finding. One, that the countries that have fallen behind in terms of using knowledge to advance their economies could possibly catch up if they paid attention to knowledge and, two, that the governments have a critical role to play in helping the countries to catch up with those that have moved ahead.

The KEI is based on four pillars – economic incentive regime, innovation, education, and information infrastructure. The index ranges from zero to ten with the countries doing poorly closer to zero and those doing well closer to ten.

A comparison between two points in time provides an indication of how well the countries have performed in the past and how they might do in the future if the content of public policy does not change. The accompanying Table provides some useful information which is worth considering in formulating public policy in the laggard regions such as South Asia and laggard countries such as Pakistan.

The Table provides data for two points in time: 1995 and the more recent, which is generally the early 2000s. The KEI has declined for G7 group of industrial countries, for all of Europe, and for most of the developing world. It has improved for East Asia.

This is one important reason why East Asia is catching up with the more advanced countries of Western Europe, North America and Japan and is also the reason why the South Asia continues to fall behind. It also tells us why Pakistan is doing so poorly relative to India.

In 1995, the KEI for India was measured at 4.02, the highest among the South Asian countries. At 2.82, Pakistan came in third, behind India and Sri Lanka. A decade or so later the Indian situation worsened a little but Pakistan’s deteriorated sharply.

The gap between India and Pakistan widened from 1.73 points in 1995 to 1.92 points in the early 2000s even though the scores for both countries fell. The Indian decline occurred in spite of improvements in the economic incentive regime as the governments headed by Prime Minister Manmohan Singh continued to dismantle what had come to be known as the “licence raj”. The country also improved its capacity to innovate. But there was decline in education and surprisingly in information infrastructure pillars. Pakistan saw declines in the heights of all the pillars. The sharpest deterioration was in the area of the “economic incentive regime” and the smallest in the “innovation” pillar.

Another way of looking at Pakistan’s situation with respect to the use of knowledge and growth for development is to do it by comparing the country’s performance with respect to India. Using the data presented in the Table we can estimate the ratios between India and Pakistan for the two periods. It is in education with the Pakistani achievement at 40 per cent of India’s that Pakistan has lagged the furthest behind. It is in information technology with Pakistan at 68 per cent of the Indian achievement that Pakistan has done the best relative to India.

Recalling that the KEI is made up of four pillars and that each pillar has five components there are in all 20 public policy options available to the state to use knowledge to promote growth. Which of these are the most important for Pakistan?

The government needs to focus on at least two areas of public policy: education and research and development or R&D. It is now well recognised that well educated and skilled people are key to not only creating knowledge but also sharing and disseminating it. There is need not only to get all children to attend school and stay in the class room to acquire basic education, there is also the need to improve secondary, higher and technical education.

South Asia has not done well in the past in these areas and continues to perform poorly. Between 1990-01 and 2002-03 enrollments rates at the secondary level worldwide increased from 55 to 71 per cent and from 16 to 26 per cent at the tertiary level. For high income countries the increases were 94 to 107 per cent for the secondary and from 47 to 66 per cent for the secondary and tertiary levels respectively. For South Asia the enrollment was only 49 per cent for secondary education. Similarly South Asia invests very little in R&D, with India once again taking the lead.

In conclusion one needs to recognise that a growth strategy for Pakistan should not only be about savings and investment rates and the allocation of investment in high priority sectors. It must also include innovation.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Foundations of economy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]In Pakistan’s early days, economic policymaking was in the hands of professional civil servants. This meant leaving the economy in the hands of the private sector but keeping a watch on its activities.[/CENTER][/I][/B]

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

LAST week I wrote about the way in which Pakistan’s history has been misrepresented by his torians, mostly under pressure by a succession of governments from the very beginning. But the most mischief was done by the administration headed by Gen Ziaul Haq.
I will focus today on how this telling of history has led to our understanding of Pakistan’s economic foundations. Having proposed a political entity that would provide economic and social com fort to the Muslim community, Jinnah and his associates failed to define its con tours. They seem to have assumed that once an independent Muslim state was created it would pursue the style of polit ical and economic governance that was practised by the British when they ruled India. That did not happen largely because of the transfer of population that accompanied partition.

As a result of the migration of 14 million people who moved across the newly defined border between India and what is now Pakistan, the Pakistani political system was seriously unsettled. This had a profound impact on the making of economic policy in the country.

Later the ‘Muslimisation’ of Pakistan — the fact that the population transfer led to an increase in the proportion of Muslims from less than 70 per cent to nearly 95 per cent — created spaces within which ‘Islamic’ operators in the country were able to redefine the idea of Pakistan. The economic significance of this development was indirect. It had two consequences. It led to an obsession with India in the making of policy and it reoriented Pakistan’s external focus towards the Middle East.

The immediate consequence of the partition of British India and the making of economic policy during Pakistan’s formative years was the attempt to create an economy that was separate from and independent of that of India. To understand why and how that was done we should concern ourselves with at least four subjects.

One, what was the shape and structure of the Pakistani economy in the late 1940s? Two, what was the policymaking environment within which the early decision-makers operated? Three, what were some of the decisions that were taken in the early days of Pakistan? And four, in what way was Pakistan’s economic future affected by the decisions that were taken early in the life of the country as an independent state?

Pakistan’s economic historians have not provided us with a detailed quantitative picture of the Pakistani economy as it was in 1947, the year of the country’s birth. There is much speculation in the picture I am going to paint today. What is Pakistan now — by that I mean the country that emerged in 1971 after East Pakistan separated to become the independent state of Bangladesh — had a population of only 30 million people. In today’s prices and exchange rate, the size of the Pakistani economy was less than $8.4bn and its per capita income was $280.

Seventy per cent of the GDP came from agriculture while almost 90 per cent of the population lived in the countryside. Working from these numbers it would appear that while rural per capita income was only $185 that in the urban areas was close to $1,000, a ratio of one-to-five.

In other words, Pakistan’s economy was primarily rural and there was much poverty in the country. Perhaps fourfifths of the population lived in what today would be called absolute poverty. Another two million people were added by the transfer of population that followed the partition of British India. Since about half the refugees settled in urban areas, the proportion of the urban population increased sharply.

Trade was an important part of the economy with trade-to-GDP ratio of 40 per cent. Much of this was with the parts of British India that became independent India and almost all of it was in commodities — food grains and raw cotton. In return most of the basic consumer goods came from India that had a much more developed industry than was the case in Pakistan.

This structure of the economy was suddenly changed by three circumstances. The first of these was the fact that those who dominated economic decision-making in the early days of Pakistan did not subscribe to any particular ideology. That was not the case in India where the political leadership took command of the economy.

In Pakistan economic policymaking was in the hands of the professional civil servants who had developed their skills in the last couple of decades of the rule by the British. This meant leaving the economy in the hands of the private sector but keeping a watch on their activities.

In India, on the other hand, Jawaharlal Nehru, the country’s first prime minister, was so impressed with the Soviet Union that he put the state on the commanding heights of the economy as Lenin had done in his country. This led to the development of the ‘licence raj’ under which the state had a tight control over the decisions taken by private enterprise. The state’s control over the Pakistani economy came later in 1972 when Zulfikar Ali Bhutto began the task of socialising the Pakistani system.

The second circumstance was the initial domination of the political structure by the migrants from India who were mostly from the urban areas. They had little understanding of an economy dominated by agriculture. Thus disposed they got an opportunity presented by India — the third circumstance — when Nehru refused to accept Pakistan’s decision not to devalue its currency with respect to the US dollar. This changed the rate of exchange from parity to 100 Pakistani rupees to 144 Indian rupees. In reaction India cut off trade with Pakistan and forced rapid industrialisation by the first generation of Pakistani leaders.

This is how the foundations of the Pakistani economy were laid in its formative years. What happened then is still resonating. It takes a good reading of economic history to comprehend how the Pakistani economy came to be developed and how it must move forward. ¦ The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.

[U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"][B]Changing profile of global economy[/B][/FONT][/SIZE][/COLOR][/CENTER][/U]

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

I HAVE written before in these pages on Pakistan’s relations with China. The question now is whether an adjustment is needed in these relations in the light of President Barack Obama’s recent visit to India and his warm endorsement of the rise of India as a global power. I believe that a closer examination of the US position should not cause any worry in Islamabad.
China continues to raise its profile in the global economy, a fact noted by President Barack Obama, the United States president in his first visit to Asia in November 2009. Then in a widely noted speech in Tokyo before he continued his Asian trip that included stops in Singapore and China, President Obama declared that he wished to cooperate with Beijing to manage the global economy.

He was recognising two facts about the structural changes that were occurring in the global system at some speed. The first was that America was no longer able to dominate the global economy as it had done after the collapse of the Soviet Union and the fall of the Berlin Wall. The second was the fast rise of China as an economic power which was to set to pass Japan and become the world’s second largest economy. This in fact happened in the middle of this year. The American president proposed a type of arrangement that was soon dubbed the “G2” in which Beijing and Washington would collaborate to define the contours of the new global economy that was emerging. The details within these contours would be filled in by the larger G20 group of countries. This larger group included not only all the members of the club of rich nations known as G7 but also a number of large emerging economies such as Brazil, India, South Africa, South Korea and Turkey. Pakistan is not a member of the group.

On his more recent trip to Asia that began with a three day stay in India, President Obama seemed to signal a significant change in his earlier stance. He appeared no longer to be focusing on the Washington-Beijing relationship as the hub from which a number of spokes emerged to reach other parts of the world. In the reordering of the world, he was now advancing the case of India.

In a meeting with the press in Mumbai he described India not as an emerging economy but as an economy that had already emerged. He repeated that sentiment in a speech delivered to the Indian Parliament in New Delhi, his next and final stop in India.

“The just and sustainable international order that America seeks includes a United Nations that is efficient, effective, credible and legitimate. That is why I can say today that – in the years ahead, I look forward to a reformed UN Security Council that includes India as a permanent member” , he told the Indian legislature that resulted in a long applause from the law makers.

This appear to spell a major change in Washington’s position with respect to the Indian interest in securing a permanent seat – and hence a veto – in the Security Council. The US president was not suggesting that he would work quickly to seat India in the Security Council as a perma nent member, a step that would not be supported by China, the only country in the region that had that status. “This is bound to be a very difficult process and it’s bound to take a significant amount of time” explained William J. Burns, the US undersecretary of state for political affairs. Burns was also speaking in New Delhi.

Why this change of heart – and mind – by President Obama and his administration about the relative roles of China and India in the global economic and political orders? There are several answers to this question. The first is that President Obama was promising India a much more important political role in the evolving global system.The role was different from the one he had promised Beijing a year earlier as he reached out to the Chinese leadership. The quasi G2 formulation was related to the management of the world economy, not the global political system.

Second, even more important than the first explanation was the rapid and somewhat unexpected economic rise of China. It had occurred much more rapidly than seen by Washington in November 2009. The US seemed to be getting worried about the pace at which China was rising. Some numbers about China’s performance tell an interesting story. According to the IMF the global economy grew by 0.19 per cent in 2009, measured in terms of purchasing power parity. China contributed 1.19 percentage points to that growth. This means that without China, the global economy contracted by one per cent.

China saved the world from serious recession. According to Vivek Arora, assistant director of the IMF’s Asia-Pacific department, China “clearly made a signifi cant contribution. It is there in the numbers. But beyond the arithmetic impact, if you take into account spill over effects, the contribution is even larger”. China, for instance, contributed 46 per cent of global domestic demand in 2009-10, up from only 22 per cent in 2008-09.

What gave China the salience it now has in the global economy is the highly successful stimulation package it developed and launched n 2009.This was a four trillion renminbi programme worth $601 billion. It saved the Chinese economy from a free fall and provided employment opportunities to 200 million migrant workers who had lost their jobs and posed a real threat to the stability of the social and political systems. This stimulation was used to restructure the Chinese economy. It has now, for instance, the world’s biggest high-speed-rail net work.

While China went about rescuing its economy vigorously, the United States dithered. According to Nobel Prize winning economist Paul Krugman who is also a columnist for The New York Times, politics inhibited action by the Obama administration.“Fearing opposition in Congress, the Obama administration offered an inadequate plan, only to see the plan weakened further in the Senate. In the end the small rise in federal spending was effectively offset by cuts at the state and local levels so that there was no real stimulus to the economy.” China has not only been able to promote its economic rise with its stimulation policies, it has also expanded its reach. Beijing has purchased $50 billion worth of IMF bonds thus increasing its presence in the institution which will help it influence the making of global economic policy. It has negotiated $95 billion in currency swaps with a number of countries including Pakistan which will pave the way for making the renminbi a global reserve currency. It has provided a third of the funds for a regional back-up mechanism for the countries in financial stress. The idea for such a fund was first mooted in 1997 following the Asian financial crisis of 199697.

China’s demand for industrial commodities is also helping to reshape global trade. Its demand for these commodities was only seven per cent of the total in 1999 but increased to 31 per cent in 2008 just before the global economy plunged into the Great Recession. As a result of the way it handled stimulation, the share increased further to 48 per cent in 2009. This has had an enormous impact on its relations with other major economies.

China now is a major trading partner of Germany. According to Goldman Sach’s Jim O’Neill, in another 12 to 18 months, “German trade with China could be as big as German trade with France”. Much of this is because of the Chinese imports of German machinery and automobiles. Total imports from Germany were $300 billion in the first nine months of 2010 compared to the same period last year.

In 2009 President Obama began to recognise China’s rising economic power and attempted to accommodate it in the evolving global economic structure. A year later he paid heed to India’s increasing political role in Asia. Pakistan needs to accommodate itself to both, not exaggerate the meanings of the American president’s recent pronouncements.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Economy under stress[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B][U][CENTER]Pakistan’s economy does not show any sign of imminent collapse. What it shows is that it is under great stress. What it has also shown is the ability to recover quickly— sometimes with a bounce.[/CENTER][/U][/B]

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

IS the Pakistani economy in a deep crisis? The answer is most definitely ‘yes’. Is the country’s economy standing at the edge of a deep abyss into which it could conceivably fall? Once again, yes. Is the economy collapsing, though? The answer is ‘most cer tainly not’.
During my long career in development economics, both as a student of the sub ject and for a much longer time as a prac titioner of the still-evolving discipline, I dealt with many faltering and some col lapsing economies. I can say with some conviction that Pakistan has not yet reached that stage.

There are several signs that point to an economic collapse. The currency loses its value, plummeting to a newer depth every day, if not every hour. I saw that happen in Argentina and Brazil. Inflation may reach the point where it becomes almost meaningless to measure the increase in prices. In some ex treme cases, barter may replace cash transactions. This too I saw happen in the southern cone of Latin America.

The government may run out of foreign reserves and may not have the money to service foreign obligations. Default becomes a possibility; it became a reality in Argentina and Ecuador. Pakistan has been close to this situation a few times but by going to the IMF, it was able to avert default. Commercial banks may default and there may be a run on the banks. This almost happened in Mexico in December 1994.

There are of course close links between politics and economics. A dramatic change in one will most likely affect the other. The writ of the government may not apply and society may begin to display total lawlessness. I saw that happen on many occasions in Haiti during my service with the World Bank in that part of the world. This is the situation of many nations of sub-Saharan Africa that have been torn by internal strife for decades.

The Pakistani economy does not show any of these signs of imminent collapse. What it shows is that it is under a great deal of stress. What it has also shown is remarkable resilience which has made it possible to pull back from near-collapse and move forward, reaching a higher plane of activity. The economy has absorbed many shocks delivered both by man and nature, and by circumstances beyond the control of those in charge of the economy at any given time.

At this time it is dealing with stresses that have been caused by all these different sources. What the Pakistan economy has also shown is the ability to recover quickly — sometimes with quite a bounce. With this as the background what I will do today is discuss three things: the current state of the economy and its immediate prospects, some ideas about the options available to the current group of policymakers and, finally, the form recovery might take once it takes hold of the economy.

Pakistan today is South Asia’s poorestperforming economy. Its projected growth rate for the next couple of years is about a third of that expected in India and about half of that considered to be plausible for Bangladesh. The current financial year — 2010-11 — is likely to be particularly bad for the economy. The great flood of 2010 has caused a loss equivalent to 3 per cent of the GDP. The damage to the economy has been estimated by foreign development agencies at $10bn.

This could lower the rate of growth of the economy by one to 1.5 percentage points a year for several years to come. This means that for the current year there will be a decline in the level of average per capita income and that, in turn, will translate into a significant increase in the number of people living in absolute poverty. The country may add 10 million people to the pool of poverty, bringing it to 40 per cent of the total population. This will be the highest point reached in many decades.

The shocks to the economy during the last couple of years have worsened the fiscal situation to the point where the budgetary deficits being experienced and projected are no longer sustainable. These deficits have not translated into a balance of payments crisis as would normally be expected. This is in part because of the steady flow of external finance, not all of which has come from the IMF and the United States. Capital sent by Pakistanis living and working abroad is an important source for covering the balance of trade deficit. Access to the income and wealth of the Pakistani diasporas is one of the several sources of possible strengths of the Pakistani economy.

Turning now to the options available to policymakers at this time to pull the economy back from possible disaster, I would start with listing three broad categories of reform that need to be put in place. They are improving the quality of governance, restructuring production and giving greater prominence to trade as a driver of growth.

Pakistan’s economy is stuck in a groove from which it is experiencing difficulties in exiting. The high-potential sector of agriculture continues to perform well below its capacity, neglecting to produce the products in which it has comparative advantage. The firms operating in the industrial and commercial sectors remain small, use antiquated production processes and don’t have much capacity to innovate. The government has seriously underinvested in the development of infrastructure and the production of public goods needed by a large and growing economy.

Trade as a driver of growth was an afterthought for Pakistan’s policymakers. The patterns that developed over time, largely the consequence of accidents of history, have remained in place. They are not allowing the country to use the extraordinary opportunities available in the international marketplace. But for reforms to be introduced in these two areas, the state will have to play an important role. The state can only become an effective player if the quality of governance improves, which I will discuss in greater detail in later articles. ¦ The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Playing the ‘moral hazard’ game[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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

THOSE of us who have argued for years that Pakistan needs to develop a new type of relationship with the world outside are finally getting their voice heard.
Some recent developments seem to indicate that the donor community is prepared to finally tell Islamabad that it needs to do much more than it has done in the past to stand on its own two feet, giving up the foreign clutch on which it has been leaning for so long.

As has been noted in these columns on many occasions, the country does well whenever there is a large inflow of foreign capital. The rates of GDP growth during the periods of Generals Ayub Khan, Ziaul Haq and Pervez Musharraf were high – about 50 per cent higher than the structural rate of increase in national output – not because the military was in charge. The rates were high because, for strategic reasons, Washington chose to pour financial resources into Pakistan.

The US strategic interest in Pakistan reappeared after 9/11 and its money started flowing in again in copious amounts. During most of this period of almost ten years the military was in charge. That is no longer the case. It is for the first time in Pakistan’s relations with the United States that a civilian government is in place as Washington’s interest in Pakistan’s economic development has acquired considerable strategic significance.

It is not because Washington is dealing with a bunch of civilian interlocutors that the message being given has changed. The donors have learnt from experience that they should not encourage the “moral hazard” approach to economic policymaking pursued by Pakistan in the past.

The term moral hazard is applied by those working in the field of finance when the regulatory system encourages excessive risk-taking. This happens in the belief that a foreign government or some other well endowed entity would come to the rescue if the risks that were taken turn sour.

One example of the working of this approach was the large-scale rescue of the American banks by the government to save them from collapse once the risks they had taken with what has come to be called “subprime” lending resulted in heavy losses. Washington stepped in with a large dose of financial aid to the banks that were considered to be “too big to fail”. More recent examples are the rescues of Greece and Ireland by the European community working with the IMF.

The same kind of approach was shown towards Pakistan on several occasions when some bilateral or multilateral donor step ped in to save the country’s economy from collapsing. It had happened in December 1996 when, on leave from the World Bank, I was placed in charge of Pakistan’s finance.

Upon arriving in Islamabad I was told that the country was close to bankruptcy with the State Bank of Pakistan running down its foreign reserves to the point at which it was unable to honour its obligations to the “preferred creditors.” This term is applied to the International Monetary Fund, the World Bank and the Asian Development Bank. Default on any of these institutions means that the country resorting to such a tactics would be shut out of the international financial system. A move in that direction is extremely hazardous.

To save the country from that situation I travelled to Beijing and was able to get a soft loan from the Chinese prime minister that helped us to tide over the payments problem we faced. An amount of $500 million was deposited immediately into Pakistan’s account in New York at the Federal Reserve Bank.

A trip to Abu Dhabi by me brought in some additional resources. I recount that story in order to underscore the important point that by resorting to the moral hazard approach we may be able to tide over the immediate financial difficulties, but each time Islamabad takes that line it erodes the confidence of the international financial markets.

Pakistan found itself in a difficult situation once again in 2000 when it went to the IMF to get support to save itself from bankruptcy.The Fund is obliged to respond to requests from its member states under what are called the “articles of agreement” – the institution’s charter. It enters into a Stand Bye Agreement (SBA) with the member facing a crisis situation under which it is able to draw down a certain multiple of its quota – the share it has contributed to the IMF capital – but only after it has agreed to fulfil a number of conditions. Most of these relate to the way the country manages its fiscal system.

The Fund’s board – the ultimate authority in the institution – does not like large budgetary deficits. There is a belief that large fiscal deficits by increasing domestic demand for goods and services also weaken the external situation as imports exceed exports and have to be paid out of the accumulated foreign exchange reserves.

The SBA 2000 with the Fund was successfully concluded and then Prime Minister pledged that the country would never return to the IMF with a begging bowl in hand. Three years later the same prime minister, however, presided over a sharp expansion in the size of the budgetary deficit and encouraged the State Bank to flood the economy with cheap money.

This was done to help the ruling party to win the 2008 elections and for President Pervez Musharraf to stay in office. A heavy price was paid for this profligacy. By the time the prime minister left office Pakistan was once again close to the brink of economic disaster.

The accumulated reserves were being depleted at a speed at which they would have been exhausted within a matter of a few months. The pledge of never going back to the IMF was broken by the new government that took office in the spring of 2008 and a very large SBA was concluded with the institution.

In terms of conditionality this was a softer arrangement; the only serious pledge made by the government was to stay within the fiscal deficit limits the Fund considered to be prudent. But the Zardari/Gilani government has found it difficult to stay within the boundaries prescribed by the Fund.

In response the Washington-based institution has decided to postpone the release of the final tranche of the large loan. Even then it allowed Pakistan $400 million as emergency assistance to take care of the additional expenditure forced upon Islamabad because of the large-scale damage to the economy and the extreme pain inflicted by the great floods of this summer. While this cycle of near-bankruptcy and rescue has taken a heavy toll on the economy, it is not clear that all decision-makers are aware of the damage that is being done. It is this cycle the donor community is asking Islamabad to break into.

This was made plain by the many speakers at the meeting of the Pakistan Development Forum in Islamabad held in mid November. That the government needs to set its house in order was vividly and depressingly demonstrated by two ministerial statements at the PDF.

On November 14, Interior Minister Rehman Malik said that Pakistan was fighting terrorism and deserved that its $50 billion foreign debt was written off. He does not seem to have realised that such a suggestion was in fact a call for default on foreign obligations, a step that would be disastrous for the country faced with so many economic problems.

Recognising that his cabinet colleague had made a serious mistake, Finance Minister Hafeez Sheikh withdrew the suggestion, using strong language. “It is a grave issue with grave consequences for future prospects”, he told the PDF a day later. “Nobody asks for it. We don’t want to be included in the list of those countries that take that route and become international pariah states.” The conclusion is clear: not only Pakistanis need to learn to live within their means, meagre though they are. The country’s leaders have also to recognise that the moral hazard approach to economic and financial management is a perilous course to take.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Corruption, Indian style[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]There are many cases of corruption in India. But there are also institutions that spring into action when they come to light. This is where Pakistan needs to go.[/CENTER][/I][/B]

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

EVEN those who continue to believe in the idea of Pakistan — and I count myself among them — cannot but accept the fact that that while India and the ‘idea of India’ have taken off, Pakistan continues to slip, falling rapidly behind its now prosperous neighbour.
The idea of Pakistan to which I refer has many meanings attached to it. I touched upon this subject in my article ‘History must not lie’ in this space earli er this month. For me the idea that a sep arate political entity was needed that did not have to contend with the weight of the Hindu majority made sense in the late 1940s.

Whether this idea will make sense ul timately will have to be left to the judg ment of history. India pursued a differ ent idea: for many leaders involved in the movement for gaining freedom from the long rule by the British it was sensible to craft a political system that would allow space to many diverse people. Diversity in India came in many forms — religious, linguistic, ethnic, caste, geography etc. There cannot be any doubt that a few hiccups notwithstanding, India has been able to work that idea.

It is quite remarkable that a Sikh has been the country’s prime minister for six years and that an Italian-born woman is by far the most powerful political figure in the country. On the other hand, the Pakistan idea is still under test. For the last several years, the Pakistani state has been failing its people: the proportion of people living in absolute poverty has been steadily increasing and has probably touched 40 per cent. If that is the case the level of poverty has touched a new record in 50 years.

I have been to India since I wrote the article mentioned here. I went to speak at a seminar organised by the Indian Council for International Economic Research where I was invited to speak on a provocative subject of ‘Has the Pakistani economy failed?’ My audience included young people from the Saarc nations. Pakistan was represented by two young women who held their ground on a variety of subjects. Since I thought my answer to the posed question would interest my read ers, I covered it in an article that appeared a week ago. Today I deal with another subject which concerns the role of the institutions of the state in handling large-scale corruption, a problem that is of great concern in both countries.

During my brief time in New Delhi, newspapers were full of stories about what had come to be called the Raja affair. Until a couple of weeks back, A. Raja from the state of Tamil Nadu was a minister in the Manmohan Singh cabinet, in charge of the portfolio of telecommunications. This is an important area of government responsibility because of the enormous economic rewards available to those who are able to secure the necessary bandwidth from the government for their operations.

India has one of the most rapidly growing telecommunications systems in the world with the penetration of cellphones increasing by the day and thus bringing in hundreds of millions of people into the expanding networks. China is the only country that has done better than India in terms of the number of people reached.

Giving the telecommunications portfolio to Mr Raja was part of the deal that Manmohan Singh struck with the Dravida Munnetra Kazhagam (DMK), a powerful party in the state of Tamil Nadu, in order to form a coalition government at the centre. The DMK has 18 members in the lower house of the Indian parliament and their support is needed for Congress to remain in power. The DMK’s powerful chief minister M. Karunanidhi wanted the telecommunications portfolio for his party because of the leverage he could exercise on his constituency.

Mr Raja took up his position when India was preparing to auction licences for the 2G spectrum, the second-generation bandwidth system, which allows hand-held devices such as cellphones to do much more than was possible under the older system. The minister apparently ignored the rules in awarding the contracts to what appeared to be favoured companies. According to a report prepared by the comptroller auditor general (CAG) and tabled in parliament a day after the minister quit his job, 85 out of 122 licences granted were illegal.

According to the report “Raja issued a press release at 2:47pm on Jan 10, 2008 giving just 45 minutes notice to the companies to assemble at the department of telecommunications to collect response letters and furnish various guarantees. It was clear that some companies had been given prior warning”. Several companies turned up with financial guarantees that pre-dated the government announcement by several days. It seemed that they had been informed of the action the minister was to take. The loss to the exchequer was calculated at a staggering Rs1.76 lakh crore.

What this incident points to is not the staggering size of corruption that was involved but that there are systems and accountability institutions in place to deal with those who go off the track. Not only was Mr Raja forced out of his lucrative position by a report prepared by a government agency, the opposition is now pushing for the establishment of a parliamentary committee that would further investigate the affair.

A. Raja was not the first high-level political person to fall. Earlier the Congress had forced Maharashtra chief minister Ashok Chavan to quit in the face of the Adarsh Cooperative Society scandal and removed Suresh Kalmadi from the party post in the light of controversies surrounding the Commonwealth Games. As The Times of India wrote in an editorial, “the compulsions of coalition politics were hardly an excuse when the minister couldn’t convincingly explain his decisions, which according to the CAG had resulted in the loss of government revenues to the tune of a staggering Rs1.76 lakh crore”.

What this particular case demonstrates is not that the Indian democracy is in danger when such a crime has been committed by a high political appointee. There are other cases being reported daily in the press including the collapse of an unauthorised building in Delhi which killed 50 people. What it shows is that there is plenty of big and small corruption in India but there are also institutions that kick into action when they come to light. This is where Pakistan needs to go. ¦ The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Will the IMF abandon Pakistan?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 06 Dec, 2010[/B]

ECONOMIES can turn quickly both ways. They can go from a situation of extreme distress to reasonable health within a matter of a few months or they can move in the opposite direction equally fast. The latter happened in the case of Pakistan in the early 2000s. From the start of the decade to mid-2007, the country’s macroeconomic performance was robust.
During the period 2000-01 to 2004-05 the country had a respectable record of growth. Real GDP grew by more than seven per cent a year while inflation also remained at seven per cent. International position improved; gross official reserves increased to $14.3 billion, sufficient to finance 3.8 months of imports.

In the period following 9/11 Pakistan received generous support from the United States and the institutions over which Washington has some influence. These include the IMF and the World Bank.

The country successfully implemented two IMF programmes, a Stand-By Arrangement (SBA) and a threeyear agreement under the Poverty Reduction and Growth Facility that provides capital to eligible borrowers on relatively easier terms – easier than the terms charged on the SBA.

The successful completion of two Fund programmes in itself was a turnaround since Islamabad had a long record of signing agreements with the Washington-based institu tions only to renege on them. The reason almost always was the same: the government’s inability to control its finance and run large and unsustainable budget deficits.

The flow of official finance was accompanied by significant debt write-offs. The result was the creation of what economists then called “fiscal space” within which the government could spend more than would have been possible otherwise.

There were also large flows of private capital that took the form of foreign direct or portfolio investment. The latter was a change for Pakistan. That foreigners were prepared to invest in the country’s stock markets was an indication of confidence in Pakistan’s economic future.

The widely read Newsweek wrote a cover story in the spring of 1985 proclaiming that Pakistan was one other Asian giant that was stirring from sleep. But that expectation turned out to be misplaced and Pakistan went back to sleep once again.

When Pakistan completed its agreements with the IMF in January 2005 it promised that it will never pick up the begging bowl again and return to the Fund for additional support. That pledge was made by the then prime minister who concurrently served as the country’s finance minister.

However, the same official presided over a significant increase in public spending. Not only that: the State Bank of Pakistan stepped in with easy money policy, flooding the economy with cheap capital.

A significant amount of the central bank’s money went into consumer finance and housing. All this was seemingly done to help President Pervez Musharraf and his political party, the Pakistan Muslim League (Q), to win the elections of December 2007. The elections were postponed by a couple of months after the assassination of Benazir Bhutto on December 27, 2007.This extension in the pre-election period gave further opportunity to the government to continue to spend freely. The result was a sharp increase in the budgetary def icit and, as is always the case, also an increase in the pressure on external resources.

Free spending by the government, however, did not win it the election held in February 2008. A new government took office in March and its finance minister de clared that he had inherited a bankrupt economy. This was a marked turn for the worse in the economy. However, relief from the donor community, including the IMF, was not immediately sought.

The country remained politically unsettled for several more months. It was only af ter the largest opposition party, Pakistan Muslim League (Nawaz), had quit the coalition government and Asif Ali Zardari had replaced Pervez Musharraf as president that Islamabad turned its attention towards managing the rapidly deteriorating eco nomic situation. One part of the strategy was to go back to the IMF for help.

The begging bowl was back in the hands of the government. In November 2008, the Fund responded with a 23 month-long Stand-By Programme for $7.6 billion, equivalent to 500 per cent quota (share) in the institution’s capital.

In return for the IMF support, the government made two promises: that it would restore macroeconomic stability and confidence through a significant tightening of fis cal and monetary policies and that adequate support would be provided to the poor.

The government promised to balance these two objectives which meant that poverty alleviation programmes would not lead to larger fiscal deficits. Islamabad indicated that it would work to reduce the fiscal deficit from 7.4 per cent of GDP estimated for 2007-08 to 4.2 per cent in 2008-09 and to only 3.3 per cent in 2009-10 while allowing for spending on social safety net.

This was an overly ambitious target to pursue; per haps an unnecessary one. In its annual report issued in June 2008, the Lahore-based Institute of Public Policy, using a macroeconomic model it had developed, determined that a fiscal deficit of 4.5 per cent of GDP was sustainable in Pakistan’s case.

The larger deficit would not produce intolerable inflation and would, at the same time, ensure that growth was not sacrificed. But the Fund prevailed and Pakistan signed on the dotted line, promising a drastic fiscal adjustment.

Apart from the impracticality of reducing the budgetary deficit by almost four percentage points in three years, the Fund’s programme was based on the assumption that a new democratic order that was beginning to take shape will have the capacity to deliver difficult structural changes. That did not happen and the targets were not achieved.

While intense discussions were taking place between Islamabad and the Fund – these were often conducted in Dubai since the Fund management was too nervous to send its staff to Islamabad as the security situation continued to worsen.

Pakistan was hit by an unprecedented flood. The floods led to a sharp deterioration in the economic outlook. The agriculture sector which accounts for 21 per cent of GDP and nearly half of employment was hard hit. There was also substantial damage to infrastructure and private property.

A combined assessment by the Asian Development Bank and the World Bank put damages and losses from the floods at about $10 billion. This could reduce the rate of economic growth by one to 1.5 per cent a year for years to come.

There was also impact on the budget. The government planned to provide $1.8 billion or one per cent of GDP in cash transfers to flood victims. Most of this money if properly delivered was likely to be spent on housing.

The Fund has kept its pressure on Islamabad in the last few months. It was not satisfied that enough effort was being made by the government in addressing the growing budgetary problem. In a statement made at the Pakistan Development Forum (PDF) on November 15, the Fund’s representative, while recognising that prior to this summer’s floods growth was picking up, “the 2009/10 budget target was missed by a significant margin and the end-2010 ceiling on government borrowing from State Bank of Pakistan was also exceeded. As a result the fifth programme review could not be completed on time.” This was the IMF’s way of saying that it was not prepared to release the next tranche to Islamabad at least not by the end of the year as was expected earlier. It continued to press for structural reforms to improve budgetary performance.

According to the IMF’s statement at the PDF: “Two areas stand out. One is the reformed general sales tax (RGST), including an effective input-crediting mechanism, reduced exemptions, and elimination of zero-rating and special rates.The other is electricity reform, where action is needed to eliminate untargeted subsidies while protecting the poor and address the problem of circular debt.” What would happen if the Fund pulled back? Would the economy take a deep plunge or would it be able to survive without too much damage to the fundamentals? I will take up these question in later articles once the results of the ongoing deliberations between Islamabad and the Fund become available.

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

[B][U][CENTER]At first the World Bank approached the subject of corruption with some diffidence even when it wished to communicate the message about its ill effects on development.[/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 07 Dec, 2010[/B]

CORRUPTION obstructs development; its prevalence hurts the poor, increases the income gap and produces political and social instability. These are no longer treated as abstract notions. As a result of some serious qualitative and quantitative work done initially at the World Bank and subsequently at several other development institutions there is now a great deal of authority behind these statements.
In the beginning the World Bank approached the subject of corruption with some diffidence even when it wished to communicate the message about its ill effects on development. It used the term ‘poor governance’ as a euphemism for corruption. It was only after the institution came under pressure from the community of donors that it incorporated corruption formally in its research programme and the concern associated with it as a part of its policy framework. Some of its senior staff got involved with NGOs that were committed to reducing corruption across the globe.

By far the most serious work in the area of corruption worldwide has been done by Transparency International (TI), an NGO based in Berlin. Its founder Peter Eigen was once a senior official at the World Bank. He joined hands with a number of former World Bank officials to create TI which within a few years developed a presence around the globe. The organisation has chapters in most large countries, including Pakistan. They work with considerable autonomy from the parent organisation but follow the methodology developed in Berlin.

TI’s annual reports based on the perceptions of those who know and work in the economies being reported on have become influential in throwing light on the incidence of corruption across the globe in developed as well as developing countries. The 2009 report which caused a fair amount of official stir in Pakistan drew on 13 different expert and business surveys “to measure perceived levels of public-sector corruption in a given country. The results in the 2009 index are sobering: the vast majority of countries score below five”.

Pakistan received a low score, sharing the 139th position with several countries including Bangladesh. On a score of zero to 10, with 10 being the least corrupt and zero given to the most corrupt, Pakistan was rated at 2.4. India was ranked at 84 with a score of 3.4. New Zealand with a score of 9.4 was assessed to be the cleanest country; Somalia with a score of 1.1 was seen to be the dirtiest.

Most of the 19 countries with scores below two had social and political problems. Among them were Iraq, Sudan, Haiti, Myanmar and Afghanistan. Pakistan was at the margin of this group of countries. According to TI, the results presented by it “prove that corruption continues to lurk where opacity rules, where institutions still need strengthening and where governments have failed to implement anti-corruption legal frameworks”. A look at the TI index suggests a strong link between democracy and the absence of corrup tion. Of the 30 countries that receive scores of more than six only two (Qatar and the UAE) are non-democratic while two (Singapore and Hong Kong) are partially democratic.

Among the world’s established democracies Portugal with a score of 5.8 is seen as the most corrupt. That democracies would score better is obvious: they have the institutions that help people to air their grievances and provide a way for punishing those who in the public sector don’t walk the straight line. A recent example of this is the way India is handling the case of its former telecom minister who is said to have caused a loss of $40bn to the government. Not only was the minister forced to resign but a criminal investigation is likely to lead to his prosecution.

There were reports in the western press that the authorities in Pakistan were harassing the Pakistani chapter of TI after the latter issued its 2009 annual report. In a recent issue, the New York Times reported that “the head of the Pakistani branch of Transparency International, the global advocacy group that monitors corruption, has alleged intimidation and harassment by government officials for its monitoring of American aid in Pakistan”. The newspaper reported Syed Adil Gilani, chairman of the Pakistani chapter of TI as saying that “recent statements of the Pakistani government amount to harassment”.

From Pakistan’s perspective continuation of corruption at a worrying level is doubly problematic since it affects the poor more than other segments of the population. Development experts have determined that the GNP needs to increase at a rate that is a multiple of the rate of increase in the population to reduce the incidence of poverty.

For a country with a highly skewed distribution of income, the GDP increase should be at least six per cent a year for the incidence of poverty not to increase. With the GDP increase expected to be less than three per cent in 2010-11 the number of people living in absolute poverty may increase by 10 million and reach 70 million.

According to the TI 2009 report, corruption prevents the “poor from participating equally in political decisions, from enjoying equality under the law, from seeing their needs reflected in policies and budgets and from accessing public goods and services. …Decisions on food and energy security, natural resources, technology and investments are often compromised by corruption — with fatal consequences”.

The debate in the country as to how much damage the prevalence of corruption was doing to the quality of governance in general and economic development in particular received a new twist with the release by WikiLeaks of cables exchanged by American diplomats with the State Department in Washington. According to one dispatch from Riyadh, King Abdullah spoke scathingly about the Pakistani president. His comments may have consequences by making the international development community even more reluctant to assist the country.

[B]The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.[/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Public policy, private sector and economic crisis[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 13 Dec, 2010[/B]

HISTORICAL experiences of a number of countries such as India, Mexico, Argentina, suggest that economies in crises can rebound quickly if right public policies are put in place.
Central to producing such a policy framework requires a close collaboration between the government, private sector, and other societal stakeholders. It was for this reason that the government established a Task Force on Private Sector Development in December 2008. It submitted its report to the government a couple of weeks ago after discussing its findings with President Asif Ali Zardari on October 29.

One of the major conclusions reached by the Task Force was that the private sector can-- and should – play an important role in getting the country out of the mess in which it finds itself today and in setting it on the path of sustained and high level of growth. Properly managed, the country has the resources and the capability to match the rates of growth of other large South Asian countries. What is needed is intelligent public policy and the grant of space within which the private sector can play its part.

In this context, the Task Force placed particular emphasis on developing an institutional and analytical framework to guide the process of decentralisation of economic decision-making. The process has begun as a result of the passage of the 18th amendment and needs to be fully supported by the governments at the federal and provincial levels. Once completed, it will bring policymakers closer to the firms and other economic actors in the system.

The Task Force recognised that the private sector has gone through periods of ups and downs. From the private-led growth model pursued between 1947, the economy in 1972 shifted to a state-led growth model as a result of the nationalisations of 1972 and 1974. Even though the process of privatisation started in 1991 and the early 2000s that reduced the role of the state in business, much remains to be done as a number of important enterprises in the utilities sector are still in the hands of the public sector.

Most of them are incurring severe losses. They are doing poorly, needing the support of the government to keep them solvent. This places additional stress on the government’s already strained budgetary situation.

Although 90 per cent of the economy today is controlled by the private sector, the culture of government subsidies to certain sectors and firms persists which has created a large budgetary burden. The private sector is dominated by very small enterprises that remain inward oriented, technologically backward, employing low-skilled labour and producing products with low levels of sophistication.

These enterprises remain small primarily because of the regulatory system in place which allows those who employ less than ten workers to avoid a number of requirements larger firms must meet. The regulatory system is also poorly enforced, focusing their attention on large firms. This creates an incentive for enterprises not to grow in size and to remain small.

There are a number of ways of encouraging the private sector to play a larger role in the economy. The private sector members of the Task Force agreed that obtaining macroeconomic stability must be a high priority for Islamabad. This will require great effort on the fiscal front. To begin with it is important to rationalise and expand the fiscal base with the goal to increase tax to GDP ratio from the current nine to 17 per cent over a period of five years.

This goal was adopted by the Task Force. Some of the sectors that are currently excluded from the tax system need to be brought in and those – individuals as well enterprises – who are able to avoid paying taxes need to face harsh penalties.

Owners of large firms complain that they are operating in an uneven playing field, unable to compete with small enterprises that avoid both regulation and the tax man. However improving the tax collection system is not the only way of improving government finance. The other is to ensure that the government spends wisely it’s albeit limited resources.

One way of ensuring this is to periodically conduct “public expenditure reviews” at the federal as well as provincial levels and share the results with the public by presenting them in the national and provincial legislatures. This will create confidence that the people’s tax money is being well spent and not wasted on frivolous activities.

I have been struck for many years – especially when I began writing on Pakistan’s economic history – as to the number of antiquated laws that have accumulated on the books. One example of this is the Agricultural Marketing Acts that were enacted by the British in the 1930s to provide protection to the Muslim peasantry against the predatory practices of Hindu moneylenders and marketing middlemen.

The Hindus are long gone but the laws remain on the books since they have developed strong vested interests that would not like to see them repealed. It is laws such as these that inhibit the development of domestic commerce. We discussed this issue in the Task Force and there was lot of support for reviewing all laws pertaining to economic activities with a view to rationalising them. This review would be a major undertaking but rationalising the legal framework would encourage private investment as well as development.

Laws that need to be consolidated and rationalised include those pertaining to labour and conditions of employment; business laws constraining Companies Ordinance of 1984; laws concerning insolvency, conglomerates and secured transactions; and those pertaining to urban land use.

In a study of the enterprise sector a few years ago – a study the government has yet to release for public consumption – the World Bank provided a picture of the current situation. Both industrial and commercial sectors are dominated by small enterprises that prefer to remain small for the reasons discussed above. Any talk of using the private sector to aid the process of development will remain abstract unless there is a full understanding of the nature of the Pakistani firm and how it can be developed.

Some of what needs to be done is in the fiscal sector and some in the legal structure. But of equal importance is the need to improve the levels of skills available to the firms. This requires a nationwide action plan based on a strategy that provides roles for both the public and the private sectors.

Trade, both external and domestic, is one other area that received a great deal of attention by the Task Force. Emphasis on a “trade oriented growth strategy” does not make much sense as an end itself. Trade should be the outcome of a whole lot of other things that need to be done and not the end point to be reached in a growth strategy. What are these things that should be highlighted in a review of trade policy that should encompass all aspects of commerce, in particular what economists call “trade facilitation.” The review of the legal system discussed above will be critical in encouraging domestic and international commerce. Improving the flow of commerce needs improvements in infrastructure but the development of a national infrastructure policy requires better understanding of what is available and what is needed. This could be done by conducting an Infrastructure Expenditure Review with a full appraisal of the available infrastructure and needed export and import supply chains covering railways, roads, airlines, ports, inland waterways, trucking etc.

The main point I would like to emphasise, basing it on the work of the Task Force, is that the use of the private sector to promote development requires review of the current interface between the public and private parts of the economy and making it more efficient and effective.This can only be done if careful thought is given by the government as well enterprise owners to the way they can support one another.

[B][I][SIZE="5"][COLOR="SeaGreen"][CENTER]Is America faltering?[/CENTER][/COLOR][/SIZE][/I][/B]
[B]By Shahid Javed Burki
Tuesday, 14 Dec, 2010[/B]

"WE can focus on what`s necessary for each party to win the news cycle or the next election. We can do what we`ve been doing. Or we can do what this moment demands, and focus on what`s necessary for America to win the future,” said President Barack Obama in a meeting with his supporters a few moments before he struck a deal with the Republicans in the US Congress on extending, among other things, the tax cuts passed during the presidency of George W. Bush.

The deal was popular with the Republicans but was received with anger by the president`s Democratic supporters. They called it a capitulation. But Obama began to sell it as “our generation`s Sputnik moment”. The reference to the Sputnik was to remind the Americans that they can be provoked into action once challenged. That happened in October 1957 when the Soviet Union launched the first Earth-orbiting satellite into space. The United States reacted by creating the National Aeronautics and Space Administration, Nasa, that put an American on the moon in 1969, 12 years after the Sputnik launch.

This could become a `Sputnik moment` if the Americans are able to set aside their deep differences and save the country from sliding into history, no longer the pre-eminent and most prominent power militarily and economically in a fast-changing world. Which way America will go matters not only for Americans but for the rest of the world as well. If history is any guide, each time the leading power has been brought down from the pedestal on which it has stood, a period of extreme chaos has ensued. If such a transition occurs it will have enormous consequences for Pakistan and the countries in its neighbourhood.

Pakistan`s neighbourhood is full of countries in which the old and new rising powers will need to compete; for the former to retain power, for the latter to acquire it. The flurry of recent activities such as President Obama`s visit to India and that of the Chinese Prime Minister Wen Jiabao to Pakistan in December indicate that that competition has already begun and will intensify for as long as the global system remains in a state of flux. That may be for a very long time. Chaos inside its borders and around it are the last things Pakistan needs at such a delicate moment in its history.

Some historians argue that the moment of transition has already arrived. It began perhaps in 2003 when President Bush launched an ill-advised and unnecessary invasion of Iraq that was to cost more than 4,000 American lives, lead to hundreds of thousands of Iraqi deaths plus an expenditure of trillions of dollars. The burden left by the war in Iraq has weighed America down.

According to historian Alfred McCoy, “despite the aura of omnipotence most empires project, a look at their history should remind us that they are fragile organisms. So delicate is their ecology of power that, when things start to go truly bad, empires unravel with unholy speed: just a year for Portugal, two years for the Soviet Union, eight years for France, 11 years for the Ottomans, 17 years for Great Britain, and in all likelihood, 22 years for the United States, counting from the crucial year 2003.”

Going by this calculus, the United States is likely to quit the world stage as the sole superpower by the year 2025. It would have occupied that position for 34 years starting with the collapse of the Soviet Union in 1991. When 2025 arrives it may not entirely leave the stage but make space for such rising powers as China and India.

As historians tell us wars not won usually lead to the demise of empires and the fall of the imperial power. It does not happen quickly; it takes many years of chaos and confusion before the new order establishes itself. The situation for America is more complicated than those faced by the powers that had dominated the world in earlier times. Washington has done poorly in the two wars it fought recently. It is in the process of getting out of Iraq but still does not know how not to get trapped in Afghanistan. But this indifferent performance in two conflicts is not the only reason why so many are now talking about America`s decline. The New York Times

The United States faces a different kind of challenge. As Thomas Friedman wrote recently for , “We don`t seem to realise: we`re in a hole and still digging. Our educational attainment levels are stagnating; our infrastructure is fraying. We don`t have enough smart incentives to foster both innovation and manufacturing; we`re not importing enough talent in an age when we have to compete for jobs with low-wage but highly skilled Indians and Chinese — and we`re still piling up debt. Responding to all this will require a whole new hybrid politics for where to cut, where to save, where to invest, where to tax and where to untax. Shaping that new politics is a revolutionary role I still hope President Obama will play.”

In other words, what is failing for America is not lack of success on the battlefield but the inability of its political system to make to the country move forward. This movement is needed in particular in an area in which America had excelled for many decades and which had contributed to the country`s rise. It was quality education which made it possible for America to invent and innovate. It is the slippage in education that will lead to America`s fall from the pedestal it has occupied since the collapse of the Soviet Union.

How poorly America is doing compared to several rising powers is revealed by a test developed by the Programme for Student Assessment and given to 15-year- old students by the Organisation for Economic Cooperation and Development, OECD. With a score of 511 in science, 500 in reading and 487 in mathematics America ranks well below a number of Asian countries including Singapore, Korea and Taiwan.

The test was given separately to the students in Shanghai, Hong Kong and Macao in China. All three ranked higher than the US with Shanghai on top of the table in all three areas. China is preparing well to ascend the ladder as America loses its step.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Continuing climate talks[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 20 Dec, 2010[/B]

PAKISTAN, in spite of all the environmental problems it faces, has given the subject little thought. It has done little to address the various types of environmental degradation it is experiencing – air and water pollution in the major cities, and contamination of water used for irrigation, accumulation of solid waste in urban areas and general deterioration in the standards of hygiene.
There is not much recognition that the country will have to deal with the melting of the Himalayan glaciers as a result of global warming. Pakistan’s exporters will have to contend with the increasing rigorous environmental requirements by the importers of the country’s products.

Islamabad has been absent from the international scene, particularly from the series of conferences that began in Copenhagen last year, concluded at Cancun in Mexico on December 11, 2010 (and will be held in Durban South Africa in 2012).

These meetings are intended to lend more substance to the Kyoto protocol which requires that most wealthy nations to trim emissions while providing assistance to developing countries to pursue a cleaner energy future. Pakistani delegations have attended the conferences but made little contribution to their deliberations.

After signing the Kyoto Protocol in 1997 – a protocol that was not endorsed by the United States under President George W. Bush – the signatories agreed to meet every year under the United Nations Framework Convention on Climate Change. But there was a problem with the adopted approach: Under the framework any of the more than 190 participating nations can hold up an agreement. It is this provision that has made it so difficult to arrive at binding international treaty to succeed the Kyoto Protocol. These meetings and others before them were held under the auspices of the UN supported Conference of Parties.

Lack of resolve and action will mean that poor countries and emerging economies of South Asia will suffer much more than rich nations and their people. Rising sea waters will render large chunks of Bangladesh’s coastal planes inhabitable. Tens of millions of people will be displaced; many will seek to find new homes in the already crowded parts of east India. India too will suffer – as will Pakistan – from the premature melting of the Himalayan glaciers that feed the large rivers of the two countries.

Climate experts believe that unusual weather patterns will become common. The floods that wrecked a good part of Pakistan will become more frequent. South Asia, in other words, will have to pay a heavy economic price for climate change produced by actions in the world’s more advanced countries. There was a hope that the promise made at Kyoto to develop a more comprehensive approach to solve this problem would be realised. That did not happen at Copenhagen in late 2009 and did not happen again in Cancun, Mexico in 2010.

For the second time in a year, world leaders failed to produce a comprehensive agreement on preventing global warming from reaching the point from which it would be exceedingly difficult and costly to pull back. At Copenhagen in December 2009, the 15th meeting after the Kyoto Protocol, the main stumbling block was China’s refusal to ac cept a mechanism that would allow the international community to verify the implementation of targets set internationally. At Cancun, the scene of the 16th meeting, Beijing appeared to soften its position, recognising perhaps that since Copenhagen it had leapfrogged over the United States to become the world’s largest emitter of greenhouse gases.

As the Cancun conference drew to a close, China and the United States appeared to be reaching an agreement for ensuring that all nations would adhere to their pledges to reduce emissions of carbon dioxide and other heat trapping gases. According to one account, the Chinese signalled a willingness to sign an accord at Cancun as long as it met their “objectives on financial aid to developing countries, transfer of clean energy technology to poor nations and a continuing of discussions under the Kyoto Protocol”.

Most developing countries insisted that targets be set and the money should continue to flow to them for projects that contribute to global warming. Japan surprised the conferees at Cancun that it would not accept any new targets under the Kyoto Protocol and Russia, Canada and some other parties to the protocol also signalled a reluctance to assume new commitments.

The developing world came with a sense of urgency to Cancun. This was heightened by the release of a report by NASA’s Goddard Institute for Space Studies which showed that “the past 12 months had produced the highest land temperatures ever recorded. The data mean that 2010 is likely to pass 2005 as the warmest ever since detailed records have been kept…The year was marked by extreme weather events, from a recordbreaking heat wave in Russia in July to the dramatic floods in Pakistan. High sea temperatures were also blamed for a global bleaching of coral reefs.” The pledges that had been made to deal individually with the matter fell well short of ensuring global temperatures don’t exceed 3.6 degrees. Celsius above pre-industrial levels which many scientists agree could be significant tipping point for a number of developing countries. Small island nations were particularly concerned; 43 of them, including, Maldives, threatened by rising sea levels went to the Cancun meetings in the form of a group determined to get some help from the international community.

There was an expectation when the international community gathered in Copenhagen in late 2009 that a successor to the landmark 1997 Kyoto Protocol would be renegotiated before it expires in 2012. For the moment, this is the only legally binding international accord aimed at reducing greenhouse gases. It was expected that at Copenhagen – if not there then at Cancun – agreement will be reached on a “common path for cutting the world’s carbon output, dole out key nations’ specific obligations and create a common market for trading greenhouse emissions. That vision has evaporated, replaced by a much looser web of climate-related efforts across the globe.” It was this “frustration that the UN climate negotiations were not producing real-world results, individual nations, states and businesses are cobbling together patch-work solutions to preserve forests, produce clean energy and scrub pollution from the air. Under this approach, businesses in California will offset their greenhouse gas emissions by funding tropical-forest preservation in Mexico and Brazil, Japan will pay for nuclear power plants in developing nations, and South Korea will in vest in promoting renewable energy at home.” The meeting in Cancun began with modest aims and ended with modest achievements. But according to one assessment, “while the measures adopted here may have scant near-term impact on the warming of the planet, the international process for dealing with the issue got a significant vote of confidence. The agreement fell well short of the broad changes, scientists say, are needed to avoid dangerous climate change in coming decades. But it lays the groundwork for strong measures in the future if nations are able to overcome emotional arguments that have crippled climate change negotiations in recent years.” The Cancun Accord sets up a new fund to help poor countries adopt to climate changes, creates new mechanisms for clean energy technology, provides compensation for the preservation of tropical forests and strengthens the emissions reduction pledges that were incorporated in last year’s Copenhagen Accord. Rich countries promised to provide $100 billion in annual climate related aid but it was left open as to where that money will come from.

There is enough in the Cancun Accord for Pakistan to benefit from but it will need a great deal of work by Islamabad working with the provinces to draw up an integrated programme for mitigating the effects of climate change – a programme that has the potential of receiving international financial and technical aid promised under the accord.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Regional strategy needed[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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

OF the 190 or so countries that participated in the recently concluded climate talks at Cancun, those of South Asia arrived without the benefit of having first worked on a regional strategy.

And yet there are many problems associated with global warming that will need to be addressed by a close collaboration among the countries of mainland South Asia — Afghanistan, Bangladesh, Bhutan, India, Nepal and Pakistan.

Regional cooperation is needed in a number of areas. These include compilation of data in order to guide the making of public policy. Research in subjects that are of particular interest to the region such as the development of crops that can withstand drought would have great consequence for the parts of the region that are likely to face water scarcity. It will be increasingly necessary to regulate the flow of water in the rivers that the countries in the area share. Reducing atmospheric pollution will need common standards and regulatory systems.

It is no longer just scientific speculation that the changes in weather patterns will cause havoc in many parts of the world. A recent study by Nasa suggests that the devastating floods that brought so much misery to many areas of Pakistan in the summer of 2010 resulted from global warming. There will be many more such weather-related events. But Pakistan is not the only country affected in South Asia.

The Indian National Centre for Ocean Services based in Hyderabad has estimated that the average global sea level rose by 1.8 millimetres a year between 1950 and 2000 but the rate of increase went up to 3.3 millimetres from 1993 and 2005. There were further increases in 2005-09. A rise in the sea level in the Bay of Bengal will inundate coastal areas and displace millions of people who will find it difficult to find living space for themselves in the already overcrowded Bangladesh. This will result in the forced migration to the highlands of neighbouring east India causing tensions between the two neighbours unless they make a joint effort to mitigate the effects of climate change.

Melting of the glaciers in the Himalayas will initially cause a significant increase in the flow of water in the many large rivers in the South Asian subcontinent that have their sources in these mountains. Once large chunks of the glacier cover have disappeared, there will be precipitous declines in the amount of water in these rivers. This will have a profound impact on the parts of India and Pakistan that rely on irrigation for sustaining agriculture. Science Daily

The security of food availability in South Asia is dependent mainly on the weather. A recent report in stated that “the South Asian summer monsoon — critical to agriculture in Bangladesh, India, Nepal and Pakistan — could be weakened due to rising temperatures in the future”. A Purdue University research group found that climate change could “influence monsoon dynamics and cause less summer precipitation, a delay in the start of monsoon season and longer breaks between the rainy periods. …With extensive research and adequate technology, the people of South Asia have the potential to learn how to guard their land and crops from the weather changes lying ahead”.

Increases in population in the South Asian countries and growing incomes in most of them would increase the demand for electricity and other forms of power in a region that is already seriously affected by brownouts. To meet this demand the South Asians will want to burn the fuels that cause atmospheric pollution. The other way would be to build a system of pipelines and electricity grids to bring energy from the energy-surplus countries of the Middle East and Central Asia. However, for that to happen, the South Asians will need to develop confidence that supplies would not be disrupted for political reasons.

In sum, South Asia is faced with a number of problems that are the result of global warming. Some of these can only be handled if the countries in the region work together to handle the situation they face. That said, it is unfortunate that the region has not developed a regional approach to the problems that have manifested themselves and will do so with even greater force in the years to come.

In the Cancun climate conference, South Asia did not present itself as a region but participated as individual countries representing their very narrow interests. India was the most active country from South Asia at Cancun. However, its interests as projected at the conference were not regional but related to its own concerns as a rapidly growing economy in need of producing energy from coal and other atmosphere-polluting sources. Like Beijing, New Delhi did not want the international community to adopt a binding treaty that would work as a constraint for it to achieve its projected rate of economic growth. This objective was achieved by both countries.

There is agreement among experts that Cancun succeeded in establishing a new way of approaching climate change. Rather than moving towards the adoption of a mega-international treaty designed to achieve enforceable objectives, a more prudent approach would be to take small steps to realise less ambitious targets. Some of these baby steps will need to be taken by the South Asian nations working together to reach common goals. The next climate meeting will be in South Africa. The countries on the South Asian mainland could begin preparing for that meeting by defining a regional agenda for which they will need foreign financial and technical assistance.

[B][I]The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.[/I][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Turning to wind for rescue[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 27 Dec, 2010[/B]

BY now it has become conventional wisdom to attribute the persistent energy crisis in the country – the growing gap between demand and supply in electricity and natural gas – to the lack of political will to tap the large resources available.

Pakistan has resources it could use for increasing power generation and with more emphasis on exploration it could bring more gas to the surface.

Wind is one of the sources of supply that can be tapped without creating too much political fuss. There is enough of it available in several parts of the country. What is needed is a strategy that would do three things: create partnership between the public and private sectors so that investments can be made by the latter within a regulatory framework developed by the former; undertake investment in transmission lines from the areas that are rich in wind to the points of consumption; and provide incentives to the Chinese to invest in the sector. In this context, it is interesting to note how the wind-power sector has developed in China over the last few years.

In developing their wind-power industry, the Chinese used the strategy with which I had become familiar when I was looking after the World Bank`s programme in that country in the period 1987 to 1994. One of the first projects I was responsible for developing in China for funding by the bank was a massive power plant at a place called Beilongjiang near Shanghai. The Chinese wanted the bank to finance the building of four 300 MW coal-fired plants. They accepted the bank`s requirements that financing will only be available by selecting the supplier through international competitive bidding. But they insisted that the winner of the contract would be allowed to bring in only one plant; the remaining three would be made in China by a subsidiary that would be established with Chinese participation. America`s Westinghouse was the bid winner.

The company went on to create a production facility in China which increased the capacity of the plants it produced first to 600 MW, then to 900 MW and now to over 1,000 MW. China is now one of the biggest manufacturers of coal-fired plants in the world. During Prime Minister Wen Jiabao`s recent visit to India, Beijing offered to build a number of plants with financing to be provided by China`s public sector banks.

The Chinese have followed the same strategy in developing their wind-power industry. In the case of this sector, the Chinese forced the Spanish company Gamesa to help create a domestic industry in the sector. According to one account, “nearly all the components that Gemesa assembled into million-dollar turbines here are made by local suppliers – companies Gamesa trained to meet onerous local content requirements.

And these suppliers undermine Gamesa by selling parts to its Chinese competitors –wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.” On 4 July 2005, the Chinese National and Reforms Commission, the country`s planning authority, issued “Notice 1204” directing that domestic wind farms had to buy equipment in which 70 per cent of the value was domestically manufactured.

This local content requirement was in clear violation of the rules of the World Trade Organisation (WTO). The Chinese had joined WTO in 1991. Its rules don`t allow the use of the incentives the Chinese have employed to create competition by developing their own industries. But companies such as Gamesa could have persuaded their home governments to go to the WTO. They decided not to take that route in spite of the fast development of the domestic industry in China.

Gamesa sells more than twice as many turbines in the country as it did when it was the market leader five years ago. In other words, even if domestic competition was developed by state support the sheer size of the economy has enough potential demand to accommodate several suppliers, both foreign and domestic.

Now the Chinese manufacturers control more than 85 per cent of the wind turbine business. Sinovel, the country`s largest company, has said it wants to become the world`s largest wind-turbine company by 2015, a goal it is well on its way to winning. In order to ease this path, the Chinese authorities withdrew “Notice 1204”. By then it was not needed.

For instance, Gamesa was now selling turbines in China that had 95 per cent local content. Their development was aided by the state that provided the companies with land and cheap credit to set up their plants and quickly expand their capacity. Gamesa`s market share has declined from about 35 per cent to only three per cent.

“With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.”

What is the relevance of the rapid development of the Chinese wind-power industry for easing Pakistan`s energy shortage? The answer to the question is obvious: China could become a major supplier of both equipment and finance to develop Pakistan`s potential in this neglected area. What China is doing in developing nuclear energy in Pakistan, it could also do for wind. I am told that during the time President Pervez Musharraf was in charge, the Chinese proposed a wind project that would have produced 1,000 MW of energy.

His prime minister, however, asked the Chinese to scale back the project to 250 MW which Beijing declined to do, arguing that a smaller wind-farm did not make much economic sense. If this story is correct, it obviously set back the country by years and discouraged the Chinese from investing in Pakistan to develop wind power.

The situation may be changing now. While in office, President Asif Ali Zardari has developed strong relations with China. His government has allowed a Chinese bank to set up operations in Pakistan which Beijing undoubtedly will use to finance the projects China is interested in building in the country.

The Chinese signed a number of agreements during Prime Minister Wen Jiabao`s three-day visit to Pakistan. These included support for the development of wind power. It is interesting that Wen`s visit and display of his country`s interest in aiding the development of wind-power came a few weeks after the late Richard Holbrooke signed an agreement to build three wind power plants in Sindh that will produce a total of 450 MW at a cost of $375 million.

This amount will be paid out of the $7.5 billion Pakistan is set to receive from the United States under the terms of the Kerry-Lugar bill.

Pakistan, in other words, may see the United States and China compete with one another to gain a foothold in its energy sector in the country.

China is already involved in developing nuclear power with the promise that it would build a large 1,000 MW plant to augment the supply of power already coming from the plants built or nearing completion. If China enters the field of wind-power, it will do so on a large scale, establishing large wind farms that will generate hundreds if not thousands of megawatts of power.

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

[B][I][CENTER]In designing its own strategy, Pakistan has to take note of an important development: the increasing American resolve to quit the Afghan scene.[/CENTER][/I][/B]


[B]By Shahid Javed Burki
Tuesday, 28 Dec, 2010[/B]

WHEN on Dec 1, 2009, President Barack Obama announced his intention to escalate the war in Afghanistan it was also his intention to keep the country fully informed about the success or failure of the strategy he was adopting.

There were three significant parts of the new strategy. The first was the deci sion to increase the size of the American force operating in Afghanistan by add ing another 30,000 soldiers, thus bring ing the total to 100,000.

The second was to shift the focus of America’s involvement away from ob taining an outright victory over the Taliban and to create, instead, areas which would be virtually free of the pres ence of the enemy. This was more likely to happen in the country’s urban areas where the government, aided by the expanding Afghan military force, could establish its control. There was also the expectation that once these areas had been pacified, economic development would win the hearts and minds of the people.

The third element of the strategy was to induce Pakistan to play a more aggressive role in helping the Americans achieve their limited aims. In return for Islamabad’s help, the Obama administration promised the country generous economic and military support valued at $9.5bn of which $7.5bn was for economic development and was to be disbursed over a period of five years.

To convince Pakistan that this assistance would be available for a reasonably long time, the US Congress passed what came to be known as the KerryLugar bill. America, in other words, was preparing to fight two wars, one each in Afghanistan and Pakistan. The Americans also indicated that they would use unmanned aircrafts, the drones, to kill the leaders and commanders of the Taliban operating out of the tribal areas of Pakistan. This was to be done with the tacit approval of the Pakistani government. It was expected that Islamabad would continue to condemn the attacks while secretly providing the Americans intelligence about the targets to be struck.

Following the announcement of the new policy, President Obama promised that a full review would be carried out and released for public view a year from the adoption of the new approach. That has happened. On Dec 16, 2010, the White House released its appraisal of the US effort in the region the Obama administration had once called Af-Pak.

The United States announced in the review that it had ‘arrested’ even ‘reversed’ the Taliban’s momentum in much of Afghanistan, particularly in the country’s south. There were successes in and around the city of Kandahar, the area from where the Taliban had risen a decade and half earlier. However, in presenting his report to the public President Obama said that gains made “remained fragile and reversible”.

The review said that specific components of its strategy for both Afghanistan and Pakistan were working and highligh ted what it said were “notable gains”. The review added: “In Afghanistan, the momentum achieved by the Taliban in recent years has been arrested in much of the country and reversed in some key areas.” But it went on to say: “The challenge remains to make our gains durable and sustainable.” According to one assessment, “the review coincides with the administration’s bid to reverse what Robert Gates, defence secretary, acknowledged was public opposition to the war in both the US and its more than 40 partners”.

Although the public policy community quickly reached the conclusion that there was nothing unexpected in the review, one part of the assessment stood out. President Obama, while signalling to Pakistan that much more was expected of it for America to succeed in Afghanistan indicated that there was also growing recognition in Washington that Islamabad’s options were limited.

The American military leaders in the field were now of the view that their country’s limited goal — creating an environment that would help the US to begin to pull out of Afghanistan by July 2011 — could be achieved even if Pakistan was unable, or unwilling, to close the sanctuaries in North Waziristan. In other words, America was concentrating on fighting one war and not two, the other being waged with the help of the Pakistani army on the other side of the border. Success, the military strategists now believed, could be achieved without a thorough cleansing of the forces of resistance operating from the Pakistani side of the border.

That Pakistan’s all-out support for the American effort across the border in Afghanistan can have grave consequences for the country has lately been underscored by suicide attacks in Mohmand and Bajaur. The army appears to have had little success in eliminating the militants here. Such attacks are part of the Taliban strategy to signal their presence in a brutal way. Earlier in the month, twin attacks in Mohmand killed some 40 people, including senior tribesmen, journalists and security personnel, in an attack on a “peace jirga assembled to plan a strategy to stand up to the Taliban … Such attacks have by now become familiar tactics. Insurgents have been often struck with suicide bombers at meetings of government officials and tribal elders to prevent them from forming anti-Taliban militias”.

In fact on the day the US administration released its assessment Germany which has the second largest force in Afghanistan, announced that it would start withdrawing its contingent of 4,800 soldiers as early as next year and complete the pullback by 2014. This was also the date when the Americans were expecting to be out of the country.

In designing its own strategy, Pakistan has to take note of these developments: the increasing American resolve to quit the Afghan scene starting in 2011 and completing the process by 2014; unwillingness on the part of America’s Nato allies to stay engaged in the country; partial success by the US in bringing peace to some of the contested areas; and some doubt on the part of the American military commanders as to the sustainability of their successes in the battlefield. ¦ The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.

[B][I][CENTER][SIZE="5"][COLOR="Green"]The year ahead[/COLOR][/SIZE][/CENTER][/I][/B]
[B][I][COLOR="Magenta"]By Shahid Javed Burki[/COLOR][/I][/B]
[B][I]Monday, 03 January, 2011[/I][/B]


By Shahid Javed Burki
WILL 2011 be a better year for Pakistan? Probably yes. Will the little bit of recovery in the rate of economic growth expected in 2011 place the country on a sustainable path of development that will approach those of the other large economies in South Asia? The answer is probably ‘not’, unless Islamabad gets serious about reforming the economy.

Will the international community continue to support Pakistan, filling the gap between government revenues and expenditures and between export earnings and import outlays? The answer is probably ‘not’, but with one exception. The exception is the IMF which is now acting at least implicitly on behalf of the entire donor community.

All these answers require some explanation which is what I will now proceed to provide. My purpose will be to describe the domestic and external environment in which Pakistan will manage its economy in 2011 and how that will affect the rate of growth, the incidence of poverty and the relations between different regions and provinces of the country.

Pakistan has just finished what will be one of the worst years in its economic history. It will be a while before the final numbers come in but one thing is certain: there will not be any increase in the average income of the citizenry. Given the distribution in national income which is becoming increasingly skewed, per capita incomes of the bottom 60 per cent of the population will undoubtedly decline. The number of poor will increase with the proportion increasing to close to 40 per cent of the total.

If the 2011 population is 175 million, this means that some 70 million people will live in absolute poverty. Perhaps 40 per cent of the poor will live in large cities and small towns where the social structure is weaker than in the countryside. In other words, the options for the urban poor are fewer than those available to those living in villages. It is this group of people that are supplying recruits to the various extremist causes.

The poor performance of the economy in 2010 was caused by natural disaster – the floods in the summer of the year just past – and poor economic and financial management. There was also a lingering effect of the Great Recession of 2008-09 which constrained the markets for Pakistani exports although the country is not as well-linked with the world as is the case with many Asian states. How the economy fares in 2011 will depend upon a number of factors. By far the most important of these will be the ability of the government to keep its programme with the IMF on track. That is necessary since the donor community has made it clear to Islamabad that its much-needed help will need the Fund’s “good housekeeping seal of approval”. For decades, Pakistan has not paid much attention to the need to generate most of finance needed for public sector investment for development and for running its non-development operations. This has made the country excessively dependent on external capital flows. The economy performs well when external finance is available; it does poorly when the flow is constrained.

Since the flows from the outside that come in the form of “official development finance” will be constrained because of the delays in carrying out the IMF supported programme aimed at fiscal reforms, this will affect the availability of resources for the government. This constrained flow of official assistance will provoke two responses. The government will borrow more from the central bank or from the market.

In the case of the former, the State Bank will be reduced to printing money which, in turn, will cause the rate of inflation to increase. In the case of the latter, government borrowing will crowd out private investment and have an effect on investment and later on the rate of growth. Since the government is depending upon its friends in the foreign community of donors, in particular on the World Bank, to finance the provision of relief to the millions of people affected by the floods, the recovery from that particular disaster will also be delayed.

The only silver lining in this dark cloud is the promise of some relief to textile exporters in obtaining enhanced access to the markets in the European Union and the United States. There is some movement on this front and this relief may become available. If that leads to increased exports it might take some pressure off external balances and stop the haemorrhaging that will otherwise result because of the decision by the IMF to suspend payments. Since so much rides on the Fund, it will be useful to provide a bit more background to the country’s current programme with that institution, the latest of the many Pakistan has attempted, but mostly failed, to implement.

A 23-month Stand-by Agreement (SBA), in an amount equivalent to about $7.61 billion was originally approved on November 24, 2009. On August 7, 2009 the SBA was augmented to $10.66 billion and the period of disbursement was extended to December 30, 2010. The Fund reviewed the progress of its programme in May 2010 when its disbursements had reached $7.27 billion and concluded that the Pakistani authorities needed to do more work before further releases could be made.

The remaining amount was to be released upon the adoption of the Reformed General Sales Tax. But the RGST legislations failed to move through the Sindh assembly, the province from where a significant amount of additional resources will be collected. It was opposed by the MQM. Islamabad told the Fund that it needed more time to prepare the political ground for the imposition of this important tax.

As was to be expected, in spite of Islamabad’s failure to adopt the policies that would increase the pitifully low tax-to-GDP ratio – this is one of the conditions of the SBA with the IMF – the institution granted a nine month extension to Pakistan for disbursing the remaining amount. According to a press release issued by the Fund on December 27, the nine month “extension will provide time to the Pakistani authorities to levy the GST, implement measures to correct the course of fiscal policy and amend legislative framework for the financial sector”.

This extension could be treated by the authorities in two very different ways. They might convince themselves that Pakistan is too big and too important a country to be allowed to fail – a kind of Citibank in the troubled world.

According to one scenario, the IMF could allow the current programme to lapse while negotiating another one that did not have the RGST as an explicit condition. The other – and I hope that is the one the government will take – is to finally adopt the series of reforms that will put the economy on the track to recovery and sustained growth. For that to happen Islamabad will have to get serious about addressing both sides of its financial ledger – the resource mobilisation as well as the expenditure side.

The environment in which Pakistan must manage its economy in 2011 is a difficult one. There are no easy options. The country is in such an economic mess for the simple reason that it has always opted for the easier course in the belief that there is somebody out there ready to pull it back from falling into an abyss.

The donor community appears to have wised up to this way of doing business in Islamabad. It should keep the pressure on. It will be good for the country, its people and for the world around Pakistan.

For closer ties
 

[B][I][CENTER][COLOR="Green"][SIZE="5"]For closer ties[/SIZE][/COLOR][/CENTER][/I][/B]

[COLOR="Magenta"]By Shahid Javed Burki[/COLOR]
Tuesday, 04 January, 2011


CHINESE Prime Minister Wen Jiabao came and went, leaving behind a large economic development programme his country will finance in Pakistan. He promised very little free money. Some cash assistance will be given to help the people hurt by last year`s flood.

Most of the promised finance, however, will flow into the projects that will pull Pakistan more firmly into China`s economic orbit.

I thought it would be interesting for readers of this column to have some background on how the Chinese have looked at Pakistan for many years and how the current programme of assistance fits into their long-term thinking.

I will relate some of the conversations I had with senior Chinese leaders when I looked after the World Bank`s programme in their country. That was for seven years between 1987 and 1994. I developed a good working relation with some of them because of the position I had taken on the West`s approach to China.

The West, in particular the Americans, wanted the World Bank to sever its relations with Beijing because of the Tiananmen Square episode. I refused to comply since I thought — and the bank`s senior management agreed with me albeit somewhat reluctantly — that the bank, as a development institution, should not be forced into taking political positions. The Chinese were very appreciative of this stance. Among them was Zhu Rongji who was then the mayor of Shanghai. He went on to become the country`s prime minister.

Once he took me to his office and showed me a huge map of China that hung on the wall. “I am showing you this map to underscore one thing,” he said. “China is landlocked on three sides. We are the only large country … compare us with other large land-mass countries such as the United States, Canada, India, Russia, South Africa and you will see that we have access to the sea only on one side, the east. We want to open our western landlocked provinces to the Arabian Sea … and the Persian Gulf. Pakistan could help us to do that.”

This conversation took place in the early 1990s when Zhu was vice premier in charge of the Chinese economy.

In another conversation, this time with the governor of Xinjiang province that borders Pakistan, I was told of China`s interest in building tourism ties between the two countries.

The governor said that he wanted to see Pakistani and Chinese airlines flying from Islamabad and Gilgit on the Pakistani side to Kashgar and Urumqi on the Chinese side. “Many tourists from both sides would like to see the Karakoram Highway and the spectacular terrain through which it passes. But doing it as a round trip can be onerous. The tourists should be able to cover one part of the journey by air.”

The governor also encouraged me to take the road trip from Pakistan to Kashgar — the Chinese call the ancient city Kashi — which I did when I led a team from the World Bank. We went in a Toyota cruiser from Islamabad to Kashgar. There were about a dozen of us in that group hailing from almost as many nationalities. We were impressed by the tourism potential of the area.

I related these exchanges and experiences to late president Ghulam Ishaq Khan who promised to have his government establish a dialogue with Beijing on these and other matters. More recently, I have had several conversations with President Asif Ali Zardari who, of all recent leaders, has given more attention to Pakistan`s economic relations with China.

In my meeting with Zardari in 2008 soon after he had taken over as president, I impressed upon him the need to develop and articulate a long-term strategy for defining relations with China. He said that he was planning to visit China every month to forge a personal relationship with the senior leaders of that country. When I said that monthly visits by the head of a large country would be hard for the Chinese to manage, he said he could travel every three months. I happened to be in China when the president came. His visit was extensively and warmly covered by the Chinese media.

Last year, I reminded the president of a suggestion I had made earlier. I had suggested that Pakistan should set up an institute of China studies, possibly in Islamabad, which should provide not only training in the Chinese language and culture but also in Chinese history, the country`s economy and its legal system, its future as reflected in its various five-year development plans, the country`s foreign policy and how it was managing its rise to become the second-most militarily powerful country in the world, China`s business practices and opportunities available for doing business in the country.

A well-developed curriculum and research programme would not only attract Pakistani students but also students from many neighbouring countries. It could easily become a premier institute for Chinese studies outside China. I also suggested that the institute be named after Zulfikar Ali Bhutto, who laid the foundation of what was to become the `all-weather friendship`. Honouring Bhutto that way would be highly appropriate.

China has already provided Pakistan with large amounts of economic and military assistance. Some high-profile projects were constructed with Chinese help. These include nuclear power plants at Chashma, the port at Gwadar, the Karokaram Highway.

More will follow as a result of the recent visit by the Chinese prime minister. But for Pakistan to cast its relations with its giant neighbour within a long-term framework, much more strategic work needs to be done. An institute such as the one I proposed would be of great help in that context.

The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Flawed microfinancing a trap for the poor[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 10 January, 2011[/B]

THE poor and the middle classes have always paid more to borrow for their needs than do the rich or those who belong to the upper middle class. This is one reason why the people lower down in the income distribution scale find it difficult to move up the economic ladder.
Often – more frequently than should happen – the poor needing money and borrowing expensively dig themselves in a deep hole.

The hole keeps on getting deeper as they attempt to climb out of it. The existence of this dilemma has been recognised for centuries and is one reason why the world’s major religions frowned upon the practice of usury. Some of them – Islam among them – banned outright charging interest to lend money.

How the poor get into deep trouble when they turn to the “markets” to borrow was investigated decades ago in harrowing detail by Malcolm Darling (1880-1969), a British official, who, working with the peasantry in the Punjab, became sensitive to the problem in his seminal work, The Punjab Peasant in Prosperity and Debt. The book was published in 1928 and had a profound impact on the making of public policy in British India.

Darling’s book led to the passage of the Agriculture Marketing Acts in a number of provinces including Punjab and Sindh. The main purpose behind these acts was to provide some protection to the Muslim peasantry against the predatory lending practices by the traders and money-lenders. Since the peasantry in these two provinces was mostly Muslim and money lending was done mostly by Hindus and Sikhs, the British feared that the increasing indebtedness of the poor could lead to communal troubles and disturb public piece in their domain.

Darling traced the impact of borrowings by the poor peasantry at almost usurious rates using their share in output as collateral. Much of the borrowing was for non-productive purposes such as weddings and other social obligations.The high rates at which loans were obtained meant that capital outstanding built up rapidly. Most borrowers found it hard to get out of debt once they had become part of the cycle of borrowings and repayments.

The question of how to meet the financial needs of the poor without putting them under an increasing burden of debt was answered creatively by a Bangladeshi professor of economics soon after his country gained independence. Muahmmad Yunus founded the Grameen Bank which lent small amounts of money to the poor, in particular poor women, to start small businesses.

The innovation factored into its lending practices by the bank was to use the community as the collateral. The poor borrowers fearing being ostracised by the community in which they lived tried hard to remain current with their payments.

Grameen went on to become a large bank and its founder was given the Nobel Peace Prize in 2006. Its success spawned a number of similar efforts in other countries in South Asia. According to one assessment “in Bangladesh alone more than 1,000 micro-enders, including government institutions, banks and charities, have about $2.2 billion in outstanding loans to some 30 million borrowers”.

First non-government organisations and later government institutions got into the microfinance business in other South Asian countries including India and Pakistan. In India more than in Bangladesh, the formal, for-profit sector joined the non-profit organisations in providing small but expensive loans to the poor.

By the middle of 2010 India’s microloans totaled $46.5 billion of which 30 to 40 per cent were in just one state, Andhra Pradesh. It was revealed that some big players had entered the field. It was reported that “India’s biggest microfinancier whose shareholders include US-based funds such as Sequoia Capital, raised $350 million in an initial public offering that cast a spotlight on the fortunes being made in the industry” The large companies were borrowing from banks at rates of 11-15 per cent but were charging 28-30 per cent which they said was needed to cover the cost of making tiny loans averaging $250 each to 30 million widely dispersed poor borrowers.

But the large lenders were not using the community pressure that was an important part of the Grameen model. They resorted to strong arm tactics that were common with traditional moneylenders. In early October newspapers in India carried the news that as many as 30 rural borrowers had committed suicide in the state in the last few months following their inability to pay back loans contracted from microfinance institutions.

On October 8, “reflecting a growing Indian backlash against an industry once touted as the financial salvation of the poor, the Andhra Pradesh cabinet approved a special ordinance that it said would stop the ‘harassment’ of small borrowers by microfinanciers”.

There was thus an explosion of business in what was once considered a niche activity. The business came under scrutiny in India and Bangladesh. According to one report, “aggressive lending has turned microfinance – once touted as a magic bullet against poverty – into a trap for the poor, who struggle to repay loans with interest rates ranging from 20-50 per cent, prompting authorities [in Bangladesh] to cap the rate at 27 per cent in November”.

The microfinance industry came under international spotlight following the release of a documentary produced by Norwegian TV that questioned the benefits of microfinance and alleged Muahmmad Yunus of misappropriating donors’ money. This was with reference to the decision taken by the Grameen Bank’s founder to transfer a grant the institution had received from the Norwegian government to a new entity created under the name of Grameen Kalyan.

While the Grameen Bank was treated as a commercial entity liable to pay taxes, the new organisation, having been registered as an NGO, was exempt from any tax obligation. Sheikh Hasina Wajed, the Bangladeshi prime minister called this action a “trick” and accused Grameen of “sucking blood from the poor.” Pakistan entered the field of mi crofinance later than Bangladesh and India. The first significant effort was made by a non-government organisation. Kashf Foundation started operations in 1996 but met with limited success. The poor just didn’t want to borrow. But the founders persisted and now the organisation has 152 branches around the country and has dispersed more than $200 million to more than 300,000 families.

According to Nicholas Kristof, a New York Times columnist, “done right, microfinance can make a significant difference. Kashf borrowers are more likely than many others to enjoy improved economic conditions – and that’s what I’ve seen over the years as I’ve visited Kashf borrowers”.

Kashf’s success led the government to come into the field. It established a microfinance institution called the Khushali Bank in 2000 which began its operations in 2003 after receiving the support of the Asian Development Bank. According to the Bank’s 2009 annual report, the Khushali Bank had built relationships with 2.5 million small borrowers. It reported that it had almost 330,000 active borrowers with total revenue of Rs1.339 billion or $16 million.The bank was also encouraging small earners to save; in 2009 it had 75,000 savers with total deposits of Rs190 million, or $2.2 million.

Pakistan appears to have escaped the problems both Bangladesh has encountered in recent years because of the relatively small size of the microfinance sector and the presence of large banks on board of the state-run Khushali Bank.

The role the private sector is playing in the field is small compared to Bangladesh and India. That notwithstanding the country could still face the same crises that have visited other parts of South Asia unless the regulators keep a watchful eye on the industry.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]History may not repeat itself[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]The military appears to have concluded that changing the commander of the ship at this time would not help it to navigate towards the safety offered by the shore.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, 11 January, 2011[/B]

FOR Pakistan history may not repeat itself this time around. The military may not intervene in politics as it did in the past whenever it felt that the country was moving on the wrong track.
What the country is currently witnessing in terms of social and political instability and economic distress has no precedence in history. Yet in the past, lesser turbulence was reason enough for the military to step in to ‘save the country’. This happened four times in the country’s turbulent past.

In 1958 Gen Ayub Khan, commanderin-chief of the army, was convinced that the frequent changes in the government, with a new prime minister being sworn in every few months, justified the staging of a coup d’etat. He threw the civilians out and established a military government that ruled for almost 11 years.

In 1969 Gen Yahya Khan thought that a popular campaign against the govern ment of Ayub Khan, prompted by an increase in the price of sugar, was a good enough reason to stage another coup d’etat and assume the presidency for himself. He ruled for almost three years and saw the breakup of Pakistan with the province of East Pakistan gaining independence as Bangladesh af ter a bitterly fought civil war.

In 1977, unhappiness with the alleged rigging of the elections held that year by the civilian government headed by Prime Minister Zulfikar Ali Bhutto brought a large number of people out in the streets and the military was back in power, this time under Gen Ziaul Haq. The general also governed as president for 11 years. He was replaced by a series of civilian governments — seven of them, counting the interim governments that were in office to prepare the country for repeated general elections — after his death in an unexplained plane crash.

The civilians attempted to sideline the military but did not fully succeed. It was one of these attempts — by Prime Minister Nawaz Sharif when he tried to replace the army chief of staff, Gen Pervez Musharraf — that led to another spell of military rule. President Musharraf governed for almost nine years.

In Jan 2011, Pakistan faces an exis tential threat even greater than the one it had to deal with after it lost its eastern ‘wing’ in Dec 1971. The government and society has been challenged by several extremist groups whose declared objective is to establish an Islamic order in the country that embraces all aspects of life — the economy, the legal and political systems, relations with the outside world.

The economy is in deep trouble, not expected to grow at a rate that will be much more than the rate of increase in population. This will mean adding perhaps as many as 10 million people to the already large pool of poverty. Most of the new poor will be in the urban areas to which belonged the assassin of Punjab Governor Salman Taseer. They will be willing recruits to extremist causes if the economy cannot find productive jobs for them.

The political structure is still in the process of being erected. Two days before Taseer was gunned down in Islamabad, the government headed by Prime Minister Yousuf Raza Gilani lost its working majority in the National Assembly when the Muttahida Qaumi Movement decided to part ways with it. A crisis was narrowly averted when the MQM was brought back on board.

Economics once again was the immediate cause of the government’s predicament. It is obliged to reform the tax revenue system if it wishes to receive funds from the IMF. The Washington-based institution wants Islamabad to introduce what is effectively a value-added tax in order to increase the pitifully low tax-toGDP ratio.

This is not supported by the MQM. The party considers a value-added tax to be a burden on the urban poor and the urban middle classes. Instead, it wants a tax structure that does not have the loopholes through which the rich can walk out with impunity. It wants the government to cut down on its own expenditure, much of which it regards as wasteful.

To this interplay between rising ex tremism, a poorly performing economy and a political system still working to find its feet must be added the problem in the country’s western border, where the Taliban have found sanctuary and from where they are operating against coalition forces in Afghanistan. Washington would like to see Islamabad show greater resolve to eliminate the sanctuaries in its tribal areas from which these groups operate.

The use of unmanned drones by the United States to kill the Taliban leaders has also resulted in the deaths of many civilians living in the area. This has caused enormous resentment against the Americans in the country and is adding to the popular support for Islamic militancy.

If one were to trace the cause and effect of Pakistan’s current predicament, which development would be placed first? Should we consider the failure of the economy the cause for the rise of extremism? Is it extremism that is hurting the economy? Is the aggressive posture adopted by the Obama administration in the Afghan war giving the extremists the platform from which to operate?

Historians will debate these questions for a long time. What is clear, though, is that Pakistan, at this time, is moving through a perfect storm. The military appears to have concluded that changing the commander of the ship would not help it to navigate towards the safety offered by the shore. What is needed is a concerted effort that involves all major groups in society. For them to work together would require a system where their differences can be resolved.

This cannot be done by the military but has to be the responsibility of a parliament that has the elected representatives of the people, a press that watches over the working of the government, and civil society institutions that represent well-defined public interests. All these are present in the country and are gaining confidence and experience. Time is on their side.

[I][B]The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.[/B][/I]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Another storm heading Pakistan’s way[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 17 January, 2011[/B]


ANOTHER storm may be heading Pakistan’s way and hit the economic shores in the next few months. If that happens, the economy, already reeling from so many different shocks, will be further set off its course.

The reference here is to the imminent increases in the prices of commodities on which Pakistan is heavily dependent. We saw that happen once before three years ago when the rise in the price of oil, food and several raw materials on which the industry depends depleted foreign exchange reserves. It was the loss in reserves that then drove the country once again into the arms of the International Monetary Fund.

The Stand-By Arrangement with the IMF that promised to provide the country with more than $11 billion initially stabilised the economy. Of this amount the IMF has disbursed more than $7 billion. This helped to improve the external situation and contributed to increasing the level of reserves to a comfortable level.

However, Pakistan has failed to implement all the conditions it was required under the IMF. The Fund responded by putting on hold further disbursements pending decisions by Islamabad to increase its pitifully low tax-to-GDP ratio. An extension of nine months has been granted for Islamabad to come up with a plan to mobilise additional domestic resources for development. This means that if the likely increase in commodity prices does materialise, the IMF option may not be readily available.

How certain is another increase in commodity prices? The accepted wisdom is that the sharp decline in 2010 was merely an adjustment in what economists call the “commodities super-cycle”. According to a recently released IMF report, “commodity prices are projected to remain high by historical standards over the medium term with risks tilted to the upside. The upward shift in commodity demand that started some 10 years ago is expected to be sustained as global growth continues to be driven by emerging and developing economies.” The term “commodity super-cycle” is used by economists to explain the ups and downs in the prices of all commodities that follow another cycle – the trade cycle. Commodity prices generally follow economic activity with a bit of a lag. Economic activity itself is subject to cyclical behaviour with every sustained increase in output followed by a decline. Sometimes these declines can be very severe as was the case with the Great Recession of 2008-09. This happens when factors other than those normally associated with cycles intervene. This was the case for the recent downturn when the downward adjustment was exacerbated by the collapse of the US housing market.

What makes the current commodity price increases different from those that preceded it is the deep restructuring of the global economy that has followed the recent recession. The world’s two most populous nations – China and India – have emerged as the drivers of global growth. Since they are relatively underdeveloped, the use of commodities is considerably higher per unit of increase in output compared to the more mature economies in the West and in Japan. For the latter, increases in output result mostly from the knowledge-based service sector where the use of physical commodities is not very significant.

As Alan Greenspan once said with considerable accuracy, the products produced by mature industrial economies are becoming progressively less heavy. That change won’t happen in China and India for some time to come. In their case, national output will remain “heavy”. China’s extraordinary economic rise in recent years has profoundly affected all parts of commodity trade – energy items, metals and agricultural output.

Recent pressure on the price of coal in the global market place illustrates some important points about the movement of prices in the commodity markets. China uses more coal per unit gross domestic output than any other major economy. Coal is by far the most important fuel for the production of electricity; it is also extensively used by households and by industry. Up until recently, China relied entirely on domestic consumption but now demand has outpaced production.

The country’s shift from being a net exporter of thermal coal – coal used to fire power stations – to become the world’s second largest importer, after Japan, is one of the structural changes that will greatly influence the commodity market. This change has occurred in only three years, one of the more rapid transformations in economic history. China is set to become the largest importer of coal in 2011, overtaking Japan when it will account for 15 per cent of the market.

The case of coal also helps to illustrate another important point about the movement of commodity prices: natural disasters and government policies can profoundly influence market trends. Unprecedented floods, the worst in a hundred years, in Queensland in north-east Australia resulted in a serious loss of production in one of the world’s most important coal-producing areas. The losses were conservatively estimated at $2.1 billion Floods also affected the Port of Gladstone, a key embarkation point for coal exports. These disruptions pushed the cost of thermal coal by nine per cent within a few weeks setting a record at $133 a ton in early January.

Public policy choices are also affecting coal production. After a series of mine accidents and Chile’s performance in rescuing almost three dozen miners trapped a mile down as result of the collapse of the supporting structure, Beijing began clamping down on illegal and unsafe mining in the country. It did not wish to be compared unfavourably with other emerging nations. This has resulted in some loss of domestic production adding to the pressure on prices in the global markets.

The other point about recent developments in the energy markets is that commodity prices of the products in the same segment of the market need not move in tandem. While the prices of various forms of coal have reached record levels, those for some other energy-producing items have done less well. The price of oil has risen, reaching almost $100 a barrel in early January. But the there is a consensus among experts that it will remain in the range of $70-$90 which is band favoured by Saudi Arabia, the world’s largest exporter.

While the International Energy Agency, the western countries’ oil watchdog, estimated that the consumption of oil in 2010 increased by 2.3 million barrels a day – one of the highest rates of the past quarter century – it projects the increase in demand in 2011 at only 1.2 mbd, or half the growth of last year. This will affect the price in international market.

It is the sharp drop in the price of natural gas, another important source of energy, that has surprised most experts. The IEA believes that a global glut in the production of natural gas will keep the prices low both in absolute terms but especially in terms of the prices of other important sources of energy – coal and oil.

Metals are another part of the commodity markets where China has had a profound influence including creating a significant divergence in price movements of various products. While the country’s rapid economic and industrial development has made it the largest consumer of almost every metal, the pressure on prices has been considerable in the case for those that face serious supply constraints. Copper is one such metal. China’s consumption of the metal has more than quadrupled since 1995 and its share in total demand has risen also fourfold, from 10 to 40 per cent. This meant a large increase in the metal’s price while no such pressure was felt by aluminum that can see quick increases in production.

These movements in the prices of commodities have a special significance for policymaking. There are both short-term and medium to longterm aspects that need to be kept under focus by the policymakers in Islamabad. There cannot be any doubt that the likely price rises in some parts of the commodity market will put pressure on balance of payments.

To save itself from another neardisaster that occurred in 2007-08, Pakistan must continue to work with the IMF to tide over the drain on reserves that is inevitable, given the composition of the country’s imports and exports. It relies on exports that don’t have dynamic markets. However, it will take time before Pakistan can bring new products to the markets. Until then, it will continue to rely on the Fund to ease the pressure on balance of payments.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Tampering with history[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][CENTER]Some of the past rulers deliberately distorted history to suit their own purposes. General Zia did the most damage in this respect by ordering the rewriting of textbooks.[/CENTER][/B]

[B]By Shahid Javed Burki
Tuesday, 18 January, 2011[/B]

ECONOMISTS have a term for what I will discuss today. They call it ‘path dependence’; how what has happened in the past can influence the present and define the future. The influence of the past can be benign, positive or negative depending on what happened in the past.

In Pakistan’s case the impact is mostly negative. The country has had a troubled history and this has had an influence on the way it has developed over the past six decades. These are difficult times and it is appropriate to weigh some of the burdens history has placed on the Pakistani people and the Pakistani state.

What we need to explore with reference to history are the several aspects of the development of Pakistan. In order to break this dependence on the past we must first do two things: list the main problems the country faces at this time and then see how they have been impacted and infected by the past.

There are half a dozen issues on which we need to reflect in a historical context in order to shape the future.

One of the more important subjects is the role of religion in politics and how its various interpretations have influenced society. We need also to examine why there is an absence of civility in public discourse and in that context why we are so unwilling to treat with compassion and understanding the minorities in our midst.

We have become progressively less tolerant towards the people we consider different from us in some respect. The shabby treatment of minorities is an amazing development in a country that was founded on the basis of protecting the rights and privileges of a community — the Muslims of British India — which was afraid it would be poorly treated at the hands of the Hindu majority. But by minorities I mean more than those that follow a different religion from the majority. I also mean those groups that speak a language or follow practices or have different ethnicity from the majority.

We should also debate the role of politics in building a durable structure of the Pakistani state. In that context what is very important is to devise ways for ensuring the accountability of elected officials who occupy positions of power. We should analyse the impact on politics, economics and society of increasing income and wealth inequalities.

As I will suggest in a later article the chain of causality that led towards the cold-blooded murder of Governor Salman Taseer includes not only a clash of two points of view concerning the role of religion. It was also abetted by a clash between two classes — the very rich and the not-so-poor.

Let me turn to the way history has been perverted to advance a certain point of view regarding the first of these many issues: the role of religion. In an earlier article titled ‘History must not lie’ published in this space on Nov 9, 2010 I suggested that Pakistan was not created to advance Islam in South Asia; it was founded to protect the economic and social rights of a distinct communi ty that felt threatened by the transfer of political power to the majority.

But that is not what we teach our children in public schools. Some of the country’s rulers have deliberately distorted history to suit their own purposes. General Ziaul Haq did the most damage in this respect by ordering the retelling of history in the textbooks taught in public schools. The government has a monopoly over the writing and production of textbooks. There is no outside peer review of what gets written. Whatever the government of the day believes in — and whatever the establishment of the day wants the people to believe — gets written.

Zia ordered the rewriting of history to assign a greater role to religion than was justified by facts. But as is vividly portrayed in Mohammad Hanif’s The Case of Exploding Mangoes — a fascinating fictional account of the Zia years — the military leader did not confine his attention to the writing of textbooks that told a historical lie. He used the unconstrained power he wielded to affect many other changes, including replacing the wording in the insignia worn on the uniforms of army personnel. The words ‘unity, faith and discipline’ were dropped in favour of a commitment to the waging of jihad.

It was President Zia’s assumption that by adopting these measures he would be able to change the mindset of the people who served in the armed forces. Did he succeed? How much have religious beliefs permeated the military? To what extent are the personnel in uniform likely to follow their religious views in carrying out their duties? These are important questions that can only be answered by carefully surveying the opinions of those who serve in the military and associated services. But that some parts of the security establishment have been penetrated was in chilling display in the assassination of Gov Taseer.

There are many reasons why the Pakistani people were prepared to accept this retelling of history. The most obvious one is the quality of education in the public school system, in which rote learning is the basis of imparting what can only be loosely described as knowledge. This unquestioning approach to life is also the reason for the lack of tolerance in public discourse.

It is extraordinary that the assassination of a liberal politician for expressing views that caused discomfort in some quarters was applauded not only by some religious scholars. It drew support from a section of the legal community. It was the same community that had bravely fought the establishment on the question of the independence of the judiciary. It is the same community that is agitating in the courts to hold the government and its agencies accountable for the plight of ‘missing persons’.

Now some of its members have no trouble in countenancing murder to silence an influential political voice. The legal community is expected to protect citizens against the use of arbitrary means to suppress dissent. Nothing can be more arbitrary than murder. By distorting our history we have distorted our worldview. ¦ The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.

An imminent food price increase
 

[B][I][CENTER][SIZE="5"][COLOR="Green"]An imminent food price increase[/COLOR][/SIZE][/CENTER][/I][/B]
[B][I]By Shahid Javed Burki
Monday, 24 January, 2011[/I][/B]
[B]
[CENTER]IN this space last week I wrote about the likelihood of Pakistan’s already battered economy receiving another shock sometime soon. In 2011 the economy is likely to be hurt by an imminent and significant rise in the prices of commodities.[/CENTER][/B]

Last week, I wrote about the recent trends in the movement of two groups of commodities: energy producing items and metals. Today I will turn to the likely impact of a number of global developments on the prices of agricultural commodities several of which are important in Pakistan’s import basket.

There is a mounting anxiety in international circles that we are about to witness an extraordinary increase in the prices of several agricultural commodities that enter the food chain.

While the economy was hammered by a number of domestic developments in the last couple of years – some of them brought on by nature such as the flood last summer of biblical proportions and some by poor public policies – further shocks are likely to be delivered by a series of developments in the international market place over which policymakers have no control.

In these difficult times Pakistan cannot afford to alienate its foreign friends. The policymakers’ poor performance in the area of domestic resource mobilisation means that its relations with the International Monetary Fund and much of the Western world will remain strained. Pakistan’s leaders will have to demonstrate that they can gather the political will needed to introduce long postponed structural reforms in particular of the tax system. They will need to do this before the donors are prepared to loosen their purse strings and come to the country’s help one more time. Help will be needed if the prices of the imported commodities increase and begin to eat into the accumulated reserves.

Much of IMF $11.3 billion standby credit has arrived and is responsible for taking the foreign exchange reserves to a comfortable level. But the Fund has stopped
further disbursements since Pakistan has not been able to meet one of the more important conditions: improving the tax system to generate more resources from within the economy. With the Fund stepping aside, Pakistan has very limited options available to meet the pressure on external accounts that will result from a rise in commodity prices.

As is usually the case with commodities, price rises are the result of a number of factors: natural disasters and changes in weather conditions, changes in the structure of demand in large countries, actions by the governments across the globe, and speculation in the forward markets. All these are in play at this time.

Russia, a major producer of wheat had one of the hottest and rainiest summers in 2010. That affected wheat output. Australia has faced serious floods in their summer (our winter) as did Pakistan. Both countries are important producers of several commodities. Argentina had a long dry spell that has affected its grain output.

Financial speculators are adding fuel to the fire that is burning in the commodities markets. Money flows have been large in recent months. Barclays Capital estimates $60 billion was injected into commodities in 2010 contributing to the increase in these prices.

Figures from the Commodity Futures Trading Commission, the US regulator, reveals very bullish bets among many mangers such as hedge funds. Concerns about speculation in the markets has prompted the United States Congress to begin to worry about the impact on the level of prices that may follow heavy trading by speculators not connected with the fundamentals of the market – supply and demand changes. Some US Senators have warned of a “speculative bubble that threatens to drive up gas and food prices even further.” They have threatened to take legislative action if the speculators continue to affect market stability.

Prices of agricultural commodities jumped recently after the United States government surprised the forward markets with the announcement that its stocks of key crops were running very low. The US Department of Agriculture said in a statement that the ratio of stocks-to-demand will fall this year to their lowest level since the mid-1970s. That was the last time the world went through a food scarcity scare. The international community at that time reacted quickly. A World Food Conference was convened in Rome which led to the creation of the International Fund for Agricultural Development, IFAD. This new UN agency was tasked with the responsibility for increasing investment in agriculture in the developing world.

For the moment no international action is contemplated as was the case in 1974. The result is that most governments are taking steps on their own. Some of these are likely to aggravate the situation as happened with the decision by Moscow to ban most agricultural exports. Moscow has said that the restrictions it placed on the export of many food products will remain in place until the end of 2011. South Korea and the Philippines have suspended some of their import duties on food items such as fish and powdered milk.

In December, Sri Lanka released rice stocks and re-imposed a price ceiling that had been removed in October 2010. The Indian government is very nervous about the price of onions that soared 80 per cent in just one week. It has allowed the import of onions from wherever it is available.

According to the Financial Times, “still in its infancy, 2011 is conjuring up memories of the start of 2008. Soaring crop prices have stoked fears of a food crisis and oil markets are bubbling…Prices of corn, soyabeans and wheat in January returned to heights that only two years ago sparked riots in more than 30 countries from Haiti to Bangladesh”.

For obvious reasons the poor are hurt more by a rise in the price of food. For them food constitutes a larger proportion of the budget than for other income groups. According to the World Bank, 65 million were thrown into poverty in 2008 and 2009 as a result of food price increases.

For the moment the prices of the crops that are important items of import by Pakistan have risen while those the country exports have stayed steady. The price of rice, by far the most important agricultural export, is likely to remain steady compared to some other food crops that are imported.

The group that matters the most for Pakistan are the oil bearing crops. The news about the stock situation in the United States resulted in a sharp increase in the price of corn and soya bean. They increased to their highest levels in 30 months. Both crops are important in this group of commodities.

There is a long history of food price increases causing political problems for governments in power which is one reason why policymakers react quickly – sometimes irrationally – to food inflation. Ayub Khan was brought down in the spring of 1969 by public agitation following the rise in the price of sugar, an
important item of consumption for the poor.

Rising food prices may have been an ingredient in the political movement that drove Tunisia’s president, Zine el-Abidine Ben Ali, from office and out of the country. One of the measures Ben Ali used a few days before throwing in his hat was to cut prices for sugar, cooking oil and other commodities. There are lessons in these experiences for Pakistan.

In a weakened and weakening political system a commodity price shock may be hard to absorb since it affects the poor and the lower middle classes more than the classes represented in the political establishment. The government needs to prepare itself and do it soon to deal with this expected shock to the troubled economy.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Tunisia’s ripple effects[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]In spite of all the palpable anger felt by the citizenry in Pakistan, it is unlikely that a Tunisian-type upheaval could take place here. There are more differences than parallels between the two nations.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, 25 January, 2011[/B]


WILL the ripples from Tunisia reach the shores of Pakistan? The not-so-quiet revolution in that country toppled the 23 year-old regime of President Zine El Abidine Ben Ali and has caused other long-ruling elites of the Arab world to quake in their well-worn seats.

Roula Khalaf of the Financial Times nicely summed up the situation in Tunisia before the fall of the Ben Ali government. “We’ve become accus tomed to an Arab order where the young people, the vast majority of the population, are unhappy with their rul ers but too apathetic to rise up for change. They grumble about the dearth of jobs, the difficulty of marrying and starting a family but they sit back and wait for better days. They rarely bother to vote since they know that the elec tions are always rigged.” But this time around they did not wait. They came out on the street and challenged the established order. Ultimately the street won.

There is broad consensus among commentators who write for the western press that other parts of the Arab world cannot remain untouched by the events in Tunisia. There are many Arab countries where ossified, autocratic and immensely corrupt governments have long been in place. Protected by the security establishment that also benefits from regime longevity, the governments were able to ignore the wishes of the masses.

That may not be that easy anymore. The Tunisian youth — by daring the government and the security establishment — succeeded in bringing about change that few thought was possible. The young have shown that they can force those who rule to take note of their problems. Since, thanks to the internet, the flow of information cannot be constrained (Arab youth, particularly in Egypt and Saudi Arabia are among the most enthusiastic internet users) events in North Africa will be noticed and parallels will be drawn.

In spite of all the palpable anger and frustration felt by the citizenry in Pakistan because of their economic plight, it is unlikely that a Tunisian-type of upheaval could take place in the country. There are more differences than parallels between the two nations.

The Tunisians had suffered politically but not that much economically. The regime was supported by a small coterie that had security forces not linked with the military to protect the regime and the established order. If the Tunisian revolution does have an effect it will be because of the way it has influenced thinking in Washington about political and social reform in the Muslim world.

Pakistan has to be especially responsive to what Washington would like to see in Arab and Muslim countries in terms of political and social development. What the Obama administration tells Pakistani leaders will be of greater consequence than what happens on the streets of Tunis. A troubled relationship with the IMF means that Islamabad would like to see the United States loosen its purse strings and allow a larger flow of resources already committed under the Kerry-Lugar Act of 2009.

There is much more money locked in that initiative than is due from the IMF. Pakistan would wish some of that money to become available in the form of budgetary support. The Americans are more interested in providing it to finance projects. Washington is in a position to lay down conditions for its support. They are more likely to be of political rather than economic nature.

Even the senior leadership of the United States — a country that has played its part in preserving autocratic regimes in the Arab world since they were easier to work with — has taken note of the change in sentiment in that part of the world. US Secretary of State Hilary Clinton barnstormed through five Gulf capitals in four days in early January, holding town hall style meetings, conferences and media interviews in which she pressed the establishment to take note of what was happening around them and accommodate change.

In a meeting in Doha, the Qatari capital, she bluntly criticised the region’s leaders for tolerating “corrupt institutions and stagnant political order.” According to one newspaper report, “her message was enthusiastically received by thousands of Arabs — from Yemen’s crowded, rubble-strewn capital of Sana to the dazzlingly modern metropolises of Dubai and Doha.” Yet the week also brought fresh reminders of how democratisation of Middle Eastern societies has worked against US interests in the region. “Those who cling to the status quo may be able to hold back the impact of their countries’ problems for a little while but not for ever,” Secretary Clinton told her audience.

Her speech was given before the Tunisian president went into exile. “If leaders don’t offer a positive vision and young people meaningful ways to contribute, others will fill the vacuum,” she continued. Her reference was obviously to the rise of extremist Islamic parties in some of the Arab countries that were persuaded to hold free elections.

The week brought the fall of the government of Prime Minister Saad Hariri in Lebanon when Hezbollah, the Islamic party supported by Iran and Syria, pulled out of the coalition. In the Gaza strip Hamas, another Islamic group, increased its operations against Israel. Both Hezbollah and Hamas had gained power as a result of the elections promoted by the George W. Bush administration as a way of delivering greater democratic freedoms.

In her swing through the Arab world Ms Clinton pushed in particular the promotion of civil society. She advocated the use of these organisations to counter corruption which she labelled a “cancer.” If this is the direction of the American thrust in Pakistan, it may lead towards better governance and a real democratic order.

[B]The writer is chairman of the Lahorebased Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.[/B]

[B][U][CENTER][COLOR="DarkGreen"][FONT="Georgia"][SIZE="5"]Taking donors on board[/SIZE][/FONT][/COLOR][/CENTER][/U][/B]


[B]By Shahid Javed Burki
Monday, 31 January, 2011[/B]

OFTEN people ask the question that do the economic policymakers know what they need to do to prevent the economic system from further deterioration?

The answer is that an able and experienced group handling the economy knows, what needs to be done but, none of the men in charge has a strong political base. It is politics that has to be managed to put in place the desired set of policies.

What is required immediately is to restore the confidence of the international community in the process and content of policymaking in Islamabad.There was expectation that the civilians, once in power, will be able to focus on economic policymaking aimed at two goals. One, the economy would become less dependent on external capital flows, relying more on internally generated resources. After all Zulfikar Ali Bhutto, the founder of the party that now holds the reins of power, emphasised independence from foreign influence as an important economic goal.

In his widely read book, The Myth of Independence, he questioned the viability of the Ayubian model of economic development. Strong economic and financial links with the West were an important part of that approach. The Bhutto book was a rejoinder to the one published by President Ayub Khan under the title of Friends, Not Masters.

Ayub had argued that the relationship with the West, in particular with the United States, was based on friendship, not on dependence. The second important goal of economic policymaking would be to provide greater benefits to the poorer segments of the population than was the case during the periods of repeated army rule.

Neither of these two outcomes has been realised. In fact, economic policymaking in the post-military period is in rough waters.This should have been expected since the new political system that was replacing the old military order would have taken a long time to shape. The process is still underway and those involved with policymaking continue to be distracted by the demands placed on them by the developing political system. What was not expected was the quality of governance-- a cause for concern.

A number of assessments point to the deterioration in this respect; the latest report published by Transparency International provides estimates of the level of corruption in the system as perceived by those who operate in it. Pakistan’s position has slipped with reference to other countries.This is an area of considerable concern for international donors. .

It is important to repair the damage since the country will continue to depend on external flows for as long as it is not able to rely on internal resources for financing development.

The current domestic discourse on economics suggests that most of the commentators dislike this continuing dependence on external flows. Their distaste may be understand but the country has to turn to its friends and increasingly to its citizens living and working abroad, to have the economy grow at the rate which would help to maintain social stability and public policy.

Islamabad, therefore, has to play particular attention to improving the quality of governance and demonstrate to the donors – and also to the citizenry – that steps are being taken to improve the system of governance.

Reforming the system of accountability and making example of the people who have exploited their positions for personal gain are some of the measures that need to be adopted quickly.

The other short-term measures relate to the system and structure of taxes.. Pakistan today has the lowest tax-to-GDP ratio among major emerging nations. Improving it is one of the conditions of continuing support by the IMF.The first set of initiatives the governments was required to take related to the reform of the general sales tax. That turned out to politically unacceptable for two reasons, one of which was correct.

The MQM saw it correctly as a regressive tax which was being levied to spare the rich and the well-to-do from making their contribution to the government’s tax revenues. It was right for the MQM, a party that represents the urban poor and the lower middle class, to stress the need for equality in the structure of taxes.The first emphasis should be on getting the betteroff to shoulder their responsibility for paying for de velopment and for financing the legitimate government functions.

In that context, it would be good if Islamabad focuses on the taxes that tap the wealth and income of the rich rather than burden the less well-to-do. It was extraordinary that President Musharaff’s finance minister removed the wealth tax from the list of taxes, further shifting the weight in tax generation away from the rich.There are other taxes that should be levied or levied at higher rates.

The most obvious ones are the tax on urban property and the tax on agriculture.The incidence of former is low and the latter cannot be collected by the federal government for constitutional reasons.

There is no reason why the constitution cannot be amended in order to treat the income from agriculture as any other income.

In so far as the tax on houses is concerned that should be collected by the local authorities. Properly levied and collected, it could become a major source of revenue and help the sub-national governments to carry out the functions that are coming their way as a result of the 18th amendment.

Those who opposed the government’s effort to levy what was called the reformed general sales tax also wanted a careful review of public sector expenditure to eliminate waste.

Where the opposition was not correct was to insist that the reformed sales tax should be collected by the provinces. The tax was envisaged has to be collected at the point of consumption and that is only feasible if the authority for doing it is with the federal government.

What is required, therefore, is a fundamental restructuring of the tax system so that the burden falls more on the well-to-do.What is also needed is a review of all government expenditures so that waste and corruption are eliminated.

These steps can only be taken by an administration focused on economic issues rather than consumed with political concerns. Regime survival is always an important concern in all political systems. In an evolving political system, Pakistan has taken a heavy toll on the attention of the policymakers. That is perhaps proper but it has to be recognised that economic degradation could also affect the government’s longevity.

Global realignment
 

[B][I][CENTER][COLOR="Teal"][SIZE="5"][U]Global realignment[/U][/SIZE][/COLOR][/CENTER][/I][/B]
[B][I]By Shahid Javed Burki
Tuesday, 01 February, 2011[/I][/B]

[B][I]THE recently concluded visit by Hu Jintao to the United States is significant for South Asia. The main purpose of the visit by the Chinese president was to reset relations between the two global powers with the aim of producing a more stable global order. [/I][/B]

The American tone at the formal meetings in Washington was very different from the one used by President Barack Obama during his visit to Beijing in November 2009. Then he welcomed China to a shared position with the United States in the emerging world order, a kind of `G2`. Now the American president talked about “cooperation and competition” between the dominant powers.

The Hu visit came after Obama`s trip to India in which he promised a larger role in world affairs to the other rising Asian power. Washington seemed to be moving away from a G2 world to a multi-polar world.

President Obama`s state visit to China in Nov 2009 was meant to introduce a new economic and political order in which most of the direction would be provided by Washington and Beijing working together within a new framework that was dubbed the G2. China seemed less willing to play the role that was being assigned to it by the new leadership in the United States. Neither side made much progress after the Obama visit. There were few breakthroughs in the relationship.

The Americans wanted the Chinese to adopt a tougher stance towards North Korea whose revealed work on uranium enrichment had caused an enormous amount of worry in the US. In economic matters there was the perennial American concern about an undervalued Chinese currency that gave the country tremendous advantage in international trade.

The Chinese were less welcoming of American investment and less open to allowing US companies to bid for government contracts than Washington had hoped. The Americans also continued to worry about the lax Chinese attitude towards the protection of intellectual property. Washington was also concerned about the aggressive posture adopted by the Chinese military. There were also the usual concerns about human rights in China.

On the Chinese side the list of worries was equally long. It included Washington`s failure to bring under control its large fiscal deficit which, Beijing believed, was the main cause of the trade imbalance between the two countries. The sale of American arms to Taiwan and Washington`s continued support of the Dalai Lama were even bigger thorns in the relationship.

The year 2010 ended with both sides showing wariness. As a Chinese journalist put it at the joint press conference addressed by Presidents Hu and Obama, there was “strategic mistrust” between the two countries. There was apprehension in Beijing that the US was seeking to encircle China and suppress its rise.

There was some fear in Beijing that in dealing with China Washington was using the tactics it had employed against the Soviet Union during the peak of the Cold War. Then, the US had established a series of formal alliances involving the countries around the periphery of the USSR. This time around Washington seemed to be concentrating its attention on India.

President George W. Bush had initially adopted that approach. President Obama was reluctant to follow the course set by his predecessor but seemed to have changed his mind midway through his first term. He went to India exactly a year after his visit to China and indicated that America`s relations with India would shape the 21st century. In Mumbai and New Delhi the American president repeatedly declared that India was no longer rising, it had already risen.

These messages were not lost on Beijing, which launched its own effort to cultivate its large Asian neighbours. In Dec 2010, a month after President Obama`s visit to India, Chinese Prime Minister Wen Jiabao went to India and Pakistan to remind the two of what China`s increasing economic might could do for them.

The prime minister announced large investment programmes in several sectors of the two South Asian economies. The message was clear: unlike the US that faced many economic and financial difficulties, China had the resources to develop South Asia.

From South Asia`s perspective the most important outcome of the summit was the signal that went out to India that President Obama was prepared to correct the course he had set earlier. Upon taking office, the first impulse on the part of the new administration was to allow greater economic and political space to Beijing. This message was read by the Chinese as recognition by Washington that it was a declining power. It was also seen as a weakness on Washington`s part in its dealings with Beijing. President Obama`s statements during his first official visit to Asia in 2009 may have contributed to greater assertiveness on China`s part in international affairs. The Obama administration was persuaded that it had moved in the wrong direction and a course correction was needed.

In Nov 2010, especially during his stay in India, the American president changed the signal his administration was giving by recognising the global importance of rising India. He and his advisers seem to have concluded that in the new international economic and political order, greater space had to be allowed to other rising countries such as India than was the case in the G2 configuration earlier espoused.

It was clear that China read the new message. During his stay in the US Hu Jintao displayed much greater humility in his pronouncements than he had done during President Obama`s 2009 visit to Beijing. He also recognised that China had a way to go before it reaches the pinnacle of global power.

The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Rising Asia in a reconfigured world[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B]By Shahid Javed Burki
Monday, 07 Feb, 2011[/B]

ONE thing has become clear as the global economy continues to recover from the Great Recession of 2008-9. The Asian states were much better equipped to deal with the downturn than the governments in the more developed economies of the West.

This is shown by the latest numbers on the rates of growth in gross national products in various parts of the globe in 2010. According to the data released recently by the Asian Development Bank, the numbers also show how far Pakistan has been left behind but also suggest how the country could play the catchup game.

East Asia led the pack of the recovering countries with an average growth rate of 9.3 per cent in 2010 after an increase of seven per cent in 2009. This means an increase of almost 33 per cent in the rate of growth, indicating a sharp recovery from the recession.

China was largely responsible for the buoyancy of East Asia. It’s GDP increased by 10.2 per cent. South Asia followed with an increase of 8.7 per cent in 2010 after a more sedate seven per cent increase in the previous year.

South Asia’s impressive performance was due to the speed of recovery of India, Asia’s other large economy. The Indian GDP increased by 9.2 per cent in 2010. The South Asian performance would have been even more impressive had the economic situation in Pakistan, the region’s second largest economy, not been that troubled.

Latin America and the Caribbean managed a respectable 5.7 per cent GDP growth rate following a contraction of 2.2 per cent in the previous year. It too was helped by the region’s largest economy – Brazil. Even sub-Saharan Africa managed to grow by 4.7 per cent compared to 1.7 per cent in 2009. Here Ghana stood out as the best performing economy.

Compared to these impressive rates of increase in the GDPs of the developing world, the economies of rich countries remain weak. After contracting by 3.4 per cent in 2009, they grew by 2.8 per cent in 2010. As was the case with the developing world, the industrial world’s recovery was also led by its largest economy – the United States. Within different regions of the developed world, size also played a role.

While the smaller economies of the European Union suffered – at least two of them, Greece and Ireland are close to bankruptcy – Germany, the area’s largest economy, seemed to have shrugged off the recession and was performing reasonably well.

What do these different regional growth rates tell us? A number of important conclusions emerge from this quick overview. The first is that size matters. The larger economies have shown to be much more resilient compared to the smaller ones. This is the opposite of what was occurring when the global economy was going through a boom. Then the smaller economies showed greater buoyancy compared to the larger ones.

It is interesting to note why that happened. It was shown that when international trade is expanding rapidly as was the case in the booming 1990s, it was easier for the smaller nations to sell their products and services in an expanding global economy and in an economy in which personal incomes were increasing rapidly.

Ireland thus was able to export its IT services to the industrial and commercial sectors of the industrial world. Similarly, Greece became an even more attractive destination of European tourism. Second, it helped that the smaller economies embedded in larger economic systems.

The incorporation of the smaller European countries in the European Union system meant that they had the markets they could easily exploit. They could also draw upon more easily on the financial resources available in the capital markets of the large countries. The French and German banks bought large denomination bonds from the smaller countries. When the receipts of these bonds were used for low yield investments as was the case with the building of the infrastructure and related facilities for hosting the Athens Olympics, the result was disastrous.

My concern today, however, is to underscore the important point that in the world emerging after the Great Recession of 2008-09, Asia will occupy a very different place from the one it had before the slowdown began.

And within Asia, China will become increasingly dominant. This is for three reasons. By far the most important of these is the rise of China which, as already indicated, was able to achieve a double digit rate of growth after a brief pause produced by the Great Recession. The pace of Chinese recovery meant that the country’s economy was able to overtake that of Japan and become the second largest in the world. This happened sooner than was generally expected. With this new position, China has joined the United States as the world’s two largest economies which will have to work together to shape the global economic system.

The second important reason for the different impact of the rise of China is that it will be able to convincingly offer a development paradigm from the one that made the United States such a dominant influence in the global econo my in the last few decades of the 20th century.

The two countries, the United States and China, arrived in different ways in reaching their present positions.

The Americans gave much more freedom to the private sector, pulling the state so far back that it had no idea how the financial sector was working to produce prosperity. That prosperity proved to be short lived since the riches that were created – in particular in terms of home ownership when assets were acquired by the people who could not afford them – could not be sustained.

America is still dealing with the problem of home foreclosures that have significantly reduced the wealth, and hence the purchasing power, of hundreds of thousands households.

China to a considerable extent and the adjacent East Asian countries to a lesser extent continue to rely on the state to oversee the working of the economy. Whenever the Asian economy seemed to be losing its balance, the state stepped in to restore equilibrium. In other words, in the new paradigm the state will have a much greater role in setting the direction the economy should be moving. The third reason why the new global order that is being constructed around Asia will be different is the emphasis the state and the society are paying in developing human skills. Enormous amounts of resources are being committed to improve the standard of education attained by the student body. Asia is investing impressively in the development of its large human resource.

In this context China has taken the lead. It is preparing for the 21st century more fully and more determinedly than any other large Asian country. Its investment in human resource development even more than the size of its economy will pose a challenge to the rest of the world. This was recognized by President Barack Obama in his State of the Union Speech delivered on January 24.

China’s rise in Asia and in the world and its focus on developing a highly skilled workforce to improve the technological base of the economy; the break-neck speed with which it is expanding and modernizing its physical infrastructure; its aggressive outreach to the countries in its neighborhood; its building of a modern system of communication to link itself with the adjacent countries pose a challenge but also provide opportunity for nations such as Pakistan that are struggling to find their place in this fast changing world.

The Planning Commission in Pakistan is currently embarked on producing a mid-term growth strategy. It is rightly focused on what it calls the “soft approach” meaning the development of the country’s large human resource. However, in taking this route it needs to determine how it can take advantage of the rising colossus right on its borders which is also building its human capacity to produce a more vibrant economy that is relevant for the 21st century.

What the last few decades have shown us is that it is well for relatively small economies to embed themselves with those that are large. The Planning Commission, therefore, must also include a regional strategy in its development framework.

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

[B]By Shahid Javed Burki
Monday, 14 Feb, 2011[/B]

PAKISTAN’s earlier five year development plans were based on development thinking of those times. What has generally been regarded as the most successful plan of the series — the Second Five Year Plan, 196065 — used capital accumulation as the driver of growth.
Even more, the plan put emphasis on the development of the public sector, the resources for which came not from domestic savings but from foreign capital flows.

Foreign funds were provided by a number of bilateral and multilateral development agencies, in particular the World Bank. While the plan was being implemented the bank set up a new agency, the International Development Agency (IDA), which provided funding to poor countries such as Pakistan on concessional terms. In other words, Pakistan received financial flows it required for meeting the investment targets of the Second Plan as cheap money.

The Second Plan set three traditions which remained the backbone of planning for several decades. These were emphasis on capital accumulation, development of the public sector and reliance on cheap foreign money to provide for investment. The short-term consequences of this approach were impressive. The GDP growth during the plan period more than doubled compared to the first decade after independence. This quickening in the pace of growth caught the attention of the global development community.

For some time - in the late 1960s, to be precise - Pakistan was lauded as the model of development that the developing world could and should follow. Several conferences were held outside Pakistan to communicate to the developing world the country’s extraordinary growth experience.

Pakistan’s performance was compared favourably with that of India which was then caught in the grip of what the Indian economists themselves called the “Hindu rate of growth”. While Pakistan’s GDP during the plan period had increased by an impressive 6.7 per cent a year, India was stuck at 3.5 per cent per annum rate of growth. The word about Pakistan’s success spread far and wide. A team of economists and planners from South Korea visited Islamabad to learn from Pakistan’s experience.

However all this excitement died quickly essentially for two reasons. The September 1965 war with India suddenly bought to an end the availability of cheap foreign capital for Pakistan. The Americans in particular punished Pakistan for going to war with its neighbour by holding back economic and military assistance. The country had now to fall back on its own resources which unfortunately were not plentiful.

Domestic resource generation could not meet the gap between savings and investment. The investment binge that had fueled economic growth in the first half of the ‘sixties could not be maintained. The second problem was the increasing growth and income disparities between the two wings of the country. East Pakistan (today’s Bangladesh) was left behind by the western wing. This bred enormous resentment among the citizens of that province. This resentment provoked a movement to gain autonomy for East Pakistan which ultimately led to a civil war and the birth of Bangladesh as an independent state.

It should be noted that today the rate of growth of the Bangladeshi economy is twice as high as that of Pakistan and it is well on its way to meeting the social de velopment objectives prescribed as Millennium Development Goals (MDGs). These were accepted in 2000 by Pakistan and other developing countries. Pakistan is not likely to meet these goals any time soon. The growth slump has now persisted for more than three years. The question is whether renewed development planning can reverse the process.

The answer from the new leadership in the Planning Commission is that it is possible to place Pakistan on the trajectory of growth that can be sustained over time. However for that to happen, the country will have to subscribe to a new development paradigm entirely different from the one that produced the short-term success achieved by the Second Five Year Plan. The new team of planners wants to adopt an entirely dif ferent approach.

In moving towards the new paradigm the planners have the support of economic theory. Development and growth economists have now moved away from the emphasis on capital accumulation and on moving workers from low productivity to high productivity jobs. Instead there is emphasis on improving the quality of human resource, on improving the technological base of the economy, on placing the private sector on the commanding heights of the economy, and on rewriting the role of the state in economic management. These four attributes of the new paradigm will require a massive shift in government priorities.

“Pakistan: A New Growth Framework”, the document issued by the Planning Commission last month asks for concentrating on what it calls the “soft” determinate of growth rather than those that it defines as “hard”. By soft the commission means policies that will channel savings into most productive uses thereby improving the quality of investments. There is also the belief that elements such as innovation, creativity and learning will yield higher and more sustainable growth than public sector investment. By hard the commission implies investment in bricks and mortar.

The table accompanying table provides some indication on how fast Pakistan has fallen in terms of some of the more important determinants of growth on which the new growth theory has began to place emphasis. The coun try is by far the worst performer when we examine in a comparative framework indices of innovation and quality of education. On the innovation index Pakistan is in the 79th place out of 132 countries on which data were collected by a group of researchers. On the quality of education the country ranks even lower. India, on the other hand, is on another scale altogether. Its position is closer to that of China. In fact, it scores better than China on the quality of education scale.

The conclusions that one draws from these numbers is obvious. The pay-off in terms of accelerating growth would be considerably higher were the country to invest in these areas than in a large number of “bricks and mortar” activities. In the Planning Commission’s above cited paper it is estimated that the government has 2000 projects that have been under implementation for years if not for decades. They continue to be on the books since they provide privileges such as cars, staff, and telephones – sometimes also housing – to project managers.

The amount of money that needs to be spent in order to complete these projects is of the order of Rs3,000 billion. Reappraising these projects, canceling those that are redundant or are too far from completion could save a significant amount of resource which could be redeployed in the “soft” part of the economy. Such an approach would have high dividends. I think it is right for the Planning Commission to put forward this paradigm to get the economy moving again.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Oversight of the global financial system[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 21 Feb, 2011[/B]


AFTER a great amount of introspection and reflection economists and policy analysts have reached two conclusions about the causes of the just concluded Great Recession. They believe that there were basically two reasons of the downturn of the world economy that devastated so many economies around the globe.
The first was the malfunctioning of the financial system. The second was the use of the housing sector to bring about better distribution of wealth. The latter was adopted as public policy by the government in the United States in particular.

Both, Democrats and Republicans concluded that the public was not prepared to use fiscal policies to improve the distribution of income. During the 1990s when the American economy boomed much of the benefit went to the wealthy while the real incomes of the middle and lower classes stagnated. One way of dealing with this situation was to improve the distribution of wealth and housing was the best available asset for achieving this goal. But this approach was adopted at the time the deregulation of the financial system was being diligently pursued. The result was that banks were able to lend large amounts of money often by not bringing it on their books through the use of products that were not regulated at all.

Enormous amount of profits were made by a number of operators in the financial system while the institutions they controlled acquired extremely risk assets. When the economy came crashing down it was the poor and the lower middle classes – the very people the system was supposed to help – who suffered the most.

The Great Recession reached well beyond the borders of the United States and hurt many countries including Pakistan. It was agreed that a new financial structure was needed that would prevent the recurrence of these series of events.The United Nations appointed a commission under the chairmanship of Joseph Stiglitz, the Nobel Prize winning economist to suggest how a new system should be structured. Stiglitz was expected to recommend a system that did not put the developing world at any disadvantage. The report the commission submitted is now being discussed by many forums around the world.

The commission correctly maintains that financial markets are not an end in themselves as they became in many parts of the Anglo-Saxon world, in particular the United States and Britain. They are supposed to perform many functions which enable the real economy to be more productive.These functions include mobilisation of savings, allocating capital and managing risk. The last function is meant to transform risk from those least able to bear it and to those that have the means to shoulder it. However, the opposite happened as the global economy unraveled in 2008-09.

In America and several other rich countries, the commission says, financial markets did not perform well the functions mentioned above. They encouraged people to spend rather than save, bringing the domestic savings rates close to zero, they misallocated capital, and they left huge risks with ordinary people.Write the authors of the United Nations’ Commission: “These problems have oc curred repeatedly and are pervasive evidence that they are systemic and systematic. And failures in financial markets have effects that spread out to the entire economy.” A number of recommendations made by the Commission have relevance not only for well-developed financial systems but also for those that are less mature such as the banking system in Pakistan. “The deregulatory philosophy that has prevailed in many Western economies during the past quarter century has no grounding in economic theory or historical experience: quite the contrary, modern economic theory explains why the government must take an active role, especially in regulating financial markets.” At this point it is useful to recall that Pakistan under the stewardship of President Pervez Musharraf and its bank er-turned prime and finance minister pulled the state further back from overseeing the banking system and capital markets than was the case in many other emerging markets, including India. Pakistan’s neighbour kept much of the banking system under the control of the state; in Pakistan, on the other hand, fourfifths of the total banking assets was placed in private hands.

That was a good move. As the recent experience with such public sector enterprises as Pakistan International Airlines and Pakistan Steel Mills has shown state’s direct involvement in the management of public utilities and manufacturing enterprises can have dire consequences for the economy. However, private ownership has to be married with public regulation to be a positive contributor to the economy. According to the Stiglitz Commission:

“Government regulation is especially important because inevitably, when problems are serious enough, there will be bailouts; thus government is explicitly or implicitly, providing insurance. And all insurance companies need to make sure that either the premiums they charge for the risks are commensurate with the risks or that the insured do not take actions which increase the burden on the insurer”. In the publicly owned companies in Pakistan, the certainty that the government will come to their rescue encouraged irresponsible behaviour.

There has been considerable innovation in the financial sector but much of it was regulatory, accounting and tax arbitrage. There was a great deal of money to be made by developing products that took advantage of the differences in these three things. Financial markets failed to make innovations which would have helped individuals and the society to manage risk better. The regulators also failed to create an environment in which firms can compete with one another. Without competition capitalism does not deliver on its promise.

According to Stiglitz and his colleagues: “When a firm is bailed out because it is too big to fail, it is evident that competition laws have not been effectively enforced. Now financial institutions have become so big that they are almost too big to save. And in the process of addressing the current crisis, we are creating ever larger financial institutions, sowing the seeds for problems down the line.The high fees and other abusive practice of credit card companies is a result of anti-competitive behaviour.” After diagnosing the problem, the commission under the direction of Joseph Stiglitz offered a series of recommenda tions that, if adopted, would save the world from facing in the future disasters such as those that threw man parts of the global economy on the ropes.The main direction of these recommendations is to involve the government in putting in place robust regulatory systems. These existed before but were designed and managed in a way that did not save the financial system from taking excessive risks in the knowledge that if the risks turned out to too much for the firms to survive , the state will step in save the faltering firms.

An ideal system of regulation would serve at least five important functions. It will (a) ensure the safety and soundness of individual financial institutions and financial system as a whole, (b) protect consumers, (c) maintain competition (d) ensure access for all and (e) maintain overall economic stability. These are all laudable objectives but the question is whether governments in emerging societies have the competence and the political will to put together a regulatory system that would operate totally without interference from vested interests.

Pakistan’s experience with the Competition Commission is an interesting illustration of how a well functioning institution operating under a brave and independent head can be thwarted from carrying its legitimate role. In such situations the regulators themselves need protection from an interfering government. This could perhaps be provided by the judicial system if it is able to function independently of government influence.

The main criticism of the Stiglitz Commission’s recommendations is that the governments are not always virtuous and would at times be prepared to act in ways that could cause damage to the society.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]‘Diaspora economics’[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B]By Shahid Javed Burki
Monday, 28 Feb, 2011[/B]


IN spite of the near melt-down of the economy, the level of Pakistan’s foreign exchange reserves remains high, reaching record levels in recent weeks. This has happened as fiscal deficit continues to increase.

Economic theory tells us that as the government runs up its deficit, it impacts the external account. The relationship is simple. A higher deficit is usually financed – if not fully then at least in part – by borrowing from the central bank. The bank prints money to provide for the government’s needs and therefore adds to money supply. With the printing of money aggregate demand increases, some of which is satisfied by increased imports. This creates a gap between import expenditure and export earnings. The gap is financed by using accumulated reserves. We know that Islamabad is running a large deficit on the fiscal account. The deficit continues to climb and is expected to reach eight to 8.5 per cent of the gross domestic product by the time the current fiscal year runs its course. That will be on June 30. And yet no pressure is being felt on the external side. As the accompanying table shows, the level of reserves continues to rise, reaching $17.45 billion by February 12.

On a yearly basis, the current levels of reserves is the highest in the last 12 years, increasing from $2.3 billion in 1998-99 to eight times as much a dozen years later. The amounts received from the International Monetary Fund have certainly contributed to this increase. Pakistan signed a stand-by arrangement (SBA) with the Fund in late 2009 which was ultimately set at well over $11 billion. More than $7 billion of this amount has been disbursed. Even if this entire amount is factored out, the reserves still remain high.

One explanation for this development is that Pakistan has benefited from an extraordinary increase in the amount of remittances sent by its people living and working abroad. According to the latest data provided by the State Bank, remittances received increased by 17.7 per cent in the seven month period between July 2010 and January 2011, reaching $6.12 billion compared to $5.2 billion in the same period last year.

There are five main sources of remittances; together the UAE, Saudi Arabia, the United States, the GCC states, and Britain account for more than 87 per cent of the total. That was to be expected since the bulk of the Pakistani population working abroad lives in these five places. But there have been changes in the ordering of these sources of flows. At one point Saudi Arabia was the most important source. It was replaced by United States for a while. Now the largest source is UAE.

In some of my earlier works on the Pakistani economy I looked in some detail at what I called “diaspora economics”. We know that diasporas follow a four-phase life cycle. Initially people who settle in new lands spend the bulk of their savings in establishing themselves economically. Once this is done they begin to send money to help families and friends back home. The third phase entails giving for organised charities – the various foundations that have established entities abroad for raising funds for their operations. The fourth phase involves making investments in the home country. The diaspo ras from Pakistan are now old and mature enough to be in their third and fourth phases. The amounts of money that can be sent home are dependent on the economic situation of the remitters.

There was an expectation that the Great Recession of 2008-09 would affect the amount of remittances since there must have been the same kind of pressure on these populations as was felt by the populations at large. That did not happen. What could be the reason? The State Bank provides one answer to the question. “It may be pointed out that the State Bank, ministry of finance, and ministry of overseas Pakistanis had undertaken a joint initiative called ‘Pakistan Remittances Initiative’ (PRI) with a view to facilitating the flow of remittances through formal channels,” says the bank in a recent report. “This initiative has started to materialise and remittances through formal channels are showing considerable growth.” While channeling remittances away from such informal transmissions as those undertaken by hawala and hundi systems may have played a part, this effort began soon after the regulatory changes adopted by the United States Treasury in the post-9/11 world. It is unlikely that the impact of these requirements continues even ten years after the regulatory system was developed. Meekal Ahmad who has written extensively on the Pakistani economic issues has speculated that the whitening of black money may have much to do with the continuing increase in the level of remittances. He explains that Section 114 (4) of the Income Tax Act of 2001allows any capital inflow into Pakistan to be recorded as “workers’ re mittances” on the payment of a small fee. Once thus recorded it becomes free of tax. This provision in the tax code runs counter to the intention of another law – the AntiMoney Laundering Law – passed during the Musharraf period as a result of the US pressure.

His interpretation is worth examination especially when there have been such large increases in the amounts of remittances coming in from UAE. Ahmed believes that in the effort to escape the tax net a significant amount of capital has left the country and comes back as remittances and goes untaxed. There is some substance in this argument. Pakistani capitalists have also made undeclared investments abroad, in particular in the Middle East. It is known that Pakistanis participated in the real estate boom in UAE – in particular in Dubai – and the residential properties they bought were rented out. The rents came into Pakistan as remittances. Under the tax law, even incomes earned abroad are taxable in Pakistan unless they fall in one of the categories on which tax is not levied. Remittances belong to this category.

One more explanation was provided to me recently by the senior executives of a large IT firm in Pakistan. They have studied the growth of their sector in the country and believe that a significant amount of the earnings from IT come from what they label as the “cottage industry”. There are, they believe, thousands of people – mostly women with basic computer skills – who do simple jobs for their friends and relatives living abroad. Preparation of web sites or maintenance of accounts are two such tasks that can be performed from the kitchen table. The compensation for this type of activity comes in the form of remittances.

While the flow of remittances has become an important part of the Pakistani economy and is now an important source of foreign exchange earnings for the country, it is not well understood exactly what kind of flow this actually is. It is important to understand what is happening in this area.

This knowledge is essential for the design of tax policies and also for developing the IT sector. Studying remittances, therefore, is good for the making of public policy.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Can G20 create a new financial order?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B]By Shahid Javed Burki
Monday, 07 March, 2011[/B]


THE Group of Twenty, or G20, is made up of seven industrial, a dozen emerging economies and the European Union. It was assembled in 1999 as a response to the Asian financial crisis that took a heavy toll on the economies of that region.

Until then much of the direction to the major organisations that have the responsibility for providing relief to the economies in distress was given by G7, the group of industrial economies.

The crisis in Asia made it clear that some of the major emerging economies have to be involved as well to shape a new global economic order. This led to the creation of G20. Since most of the issues addressed by the new group concerned finance, the IMF became its de facto secretariat.

Questions remain as to how representative is the G20 of the global economy. Of the 12 countries from the emerging world the largest number is from Asia. The continent is represented by Australia, China India, Indonesia, and the Republic of Korea. Latin America has three members: Argentina, Brazil and Mexico. Saudi Arabia and Turkey are from the Middle East. The African continent and East Europe each has only one member – South Africa, and Russia respectively. There are some glaring omissions in the composition of the group. Pakistan and Egypt, for instance, have large enough economies to have been included but were kept out mostly for political reasons.

The G20 has handled a range of issues since its creation in 1999. These include growth policies, the international financial system, dealing with financial crises and combating terrorist financing. The group has attempted to foster the adoption of internationally recognised standard through the example set by its members in areas such as the transparency of fiscal policy, combating money laundering, and financing of terrorism.

In 2004, the group committed itself and by implication the entire world to new higher standards of transparency and exchange of information on tax matters. It is this decision that led to the exposure of thousands of Americans who were maintaining large amounts in accounts in foreign banks to avoid being taxed. It is the work done by the G20 ministers concerning transparency that will help locate and possibly repatriate the large sums of money that were siphoned off by the autocrats of the Middle East some of whom have fallen and some other will undoubtedly be removed in the coming weeks and months. It is in the area of the management of the global economic and financial systems that G20 has attempted to play an important role. However, its efforts have only been half successful. In November 2008, as the world was rapidly plunging into what has come to be called the Great Recession of 200809, the administration of then President George W. Bush took the decision to turn to G20 to devise public policies needed to cushion the impact of the downturn. However, those were the waning days of the Bush administration.

Barack Obama had already been elected as the new American president and his predecessor was not in any position to commit his country to any particular approach. That changed in April 2009 when the heads of state met in London for their second summit – the first being the one held in Washington – and took two decisions that were to significantly affect the course of events in the global economy. The first was to commit the countries to launch programmes for stimulating their economies through fiscal expansion. The largest of the many programmes that were launched as a consequence of this decision were in China and the United States.

Each country spent close to a trillion dollars in stimulating their respective economies. The second decision was to provide large amounts of new resources to the International Monetary Fund, the World Bank, and three regional development banks to inject capital into the countries in distress. It was because of this additional funding made available to the IMF that Pakistan was able to sign a large Stand-by Arrangement with the IMF.

While the G20 was apt at dealing with economic and financial crises, it has made little progress in getting its members to agree on solutions to the structural problems that currently plague the global economy. These are collectively referred to as “global imbalances”.

These include the large trade and current account surpluses in countries such as China, South Korea and Japan. These surpluses are balanced by equally large deficits by the rich countries in particular the United States. In explaining why there are such imbalances China and the United States have focused on different causes and hence have pushed different approaches to deal with them. China believes that the cause is the large fiscal deficit being run by Washington which increases domestic demand in that country and forces it to import more than it can really afford. This is the second global imbalance.The United States’ view, on the other hand, is that the Chinese have created a large demand for their manufactures by keeping low the value of their currency.

If the Chinese allowed the yuan to appreciate, the demand for their exports would decline and it would not run such large surpluses in the trade account. Misalignment of international currencies, therefore, is an important issue for Washington. There is also a belief in the United States that if the Chinese were to properly price their currency, it would slow down the process of de industrialisation that is affecting the structure of the American economy and is causing severe job losses in that country.

Some progress was expected in resolving – or at least making some advance – with respect to this dispute at the recently concluded meeting in Paris of the G20 finance ministers and central bank governors. That did not happen.

The communiqué issued after the conclusion of the meetings made some general statements. “We reaffirm our commitment to coordinated policy action by all G20 members to achieve strong, sustainable and balanced growth”, wrote the ministers and central bankers.

Our main priority actions include implementing medium term fiscal consolidation plans differentiated according to national circumstances in line with our Toronto commitment, pursuing appropriate monetary policy, enhancing exchange rate flexibility and to better reflect underlying economic fundamentals and structural reforms, to sustain global demand, increase potential growth, foster job creation and contribute to global rebalancing”.These were essentially a list of the objectives to be achieved not how they would be realised.

From Pakistan’s perspective it is important that the group “discussed concerns about consequences of excessive commodity price volatility and asked our deputies to work with international organisations and to report back to us on the underlying challenges posed by these trends for both consumers and producers and consider possible action. Keeping in mind the impact of this volatility on food security, we reiterate the need for longterm investment in the agricultural sector in developing countries”.

What this quick overview of the progress made by G20 over the last dozen years, especially since the heads of state and government got involved in its deliberations is that a forum is in the making that will provide direction to the global economy.

However, Pakistan is absent from the forum and has only a weak voice in the IMF and the World Bank where it can – and should – pursue its national interest. One of the priorities of Islamabad’s diplomacy should be to gain access to G20 even if it means increasing the size to G25.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Oil price hike to retard economic recovery[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 14 March, 2011[/B]

THE global economy — and that means not just the economies of the developed world but also of developing countries such as that of Pakistan — are going through another ‘black swan’ moment. The term was coined by Nassim Taleb to describe the impact on the economic systems of what are very low probability events.
He claimed that most economic thinking and most financial models are based on the assumption that the past will define the present and the future. That may be the case most of the time but not all the time. In fact, it is the unexpected that has more to do with the way economic systems move than normal occurrences.

The latest “black swan moment” is related to the unfolding revolution in the Middle East. Not even the most astute observer of politics of the area had imagined that the Arab streets would explode the way they did; that two well-established regimes would collapse within days of feeling the pressure from the streets, and that a third country would see a civil war between the defenders and opponents of a regime that had lasted for more than four decades.

If these developments had occurred in some other parts of the world, they may not have been noticed with as much interest. But in the case of the Middle East, with the world’s dependence on imported oil of which the region had a great deal of spare, the political upheaval had far-reaching consequences.

Once it became clear that the political change in Libya will not be as fast as those that took place in neighbouring Tunisia and Egypt, the world oil markets became nervous. Although Libyan exports account for only two per cent of the oil traded in international markets and although disruption in supplies affected one-half of Libya’s exports, the market reacted with near-panic. On Monday, March 7, the US oil prices increased to their highest levels since September 2008, trading at an intraday high of $106.95 a barrel, as Brent, the European benchmark, hit a session high of $118.50.

Gold jumped to a record of $1,444 an ounce. Stock markets in both developed and developing countries came under pressure. Any prolonged downturn in their values would dampen consumer confidence.Vix index is one indicator of the way the markets were looking at the situation. Often called “Wall Street’s fear gauge”, it rose by eight per cent on March 7, one of the sharpest increases in recent times.

These increases were bad news for most parts of the global economy. If they persisted they would reduce the pace of recovery from the Great Recession of 2008-09 and seriously hurt countries such as Pakistan that were not only dependent on imported oil but were still struggling with serious economic downturns. Even though experts pointed out that the disruption in supply was minimal, and that there was enough capacity in the oil exporting countries to meet the shortfalls that had originated in Libya, the market sentiment remained jittery.

Oil price depends not only on the balance between demand and supply. As became evident in 2008 during the previous period of price escalation, speculators played an important role in the market. They were back in play. There was speculation that the situation in Libya will get much worse before it stabil ises. The turmoil could reach Saudi Arabia and were that to happen, not only will the price go through the roof but would also produce a severe global economic downturn, deeper than the one from which the world had only just begun to recover. Nouriel Roubini, an economist who had predicted the global financial crisis said that an increase in price to $140 a barrel will cause some advanced economies to slide back into recession.

Of the options that were available to the global community, one was already in place and the other was being talked about. The first was to have the countries with the capacity to increase their output to step in and increase their supplies. The second was for the United States to tap its strategic reserves. Opec which controls about 40 per cent of global oil supplies was divided about its response to the crisis. While Saudi Arabia, Kuwait and Nigeria were ready to increase their output, Iran and Algeria were of the view that such a response was not required.

Nonetheless, industry’s officials said the production increase ex pected by early April including the increase already announced by Saudi Arabia would make up the shortfall in supply expected to occur in Libyan oil exports. Riyadh had already increased its pumping by 700,000 barrels a day while the Kuwaitis and the Nigerians were working on increasing their output by 300,000. The two together would provide an additional one million barrels a day which was equal to the decline in Libyan exports.

The other option to take out some excitement from the oil market was for the United States to tap its Strategic Oil Reserve which holds 727 million barrels of oil in the depleted salt mines in Texas and Louisiana. These reserves were created in response to the 1973 oil embargo imposed by the Arab oil producers but have not been used to stabilise prices. Several analysts believe that even a hint that the reserves could be used would take the panic out of the markets.

One consequence of the increase in oil price is to significantly enhance the economic power and standing of Russia, now the largest producer of oil in the world. The country does not keep any spare capacity – that would be difficult to do in the extreme cold in which its wells are located. Combining gas with oil, Russia is by far the largest energy exporter in the world. According to one analyst, “Russia is not only outside Opec, and thus free from cartel’s restraints but also, with its formidable secret policy apparatus and population bulge among the elderly rather than the young, is seen as less vulnerable to an outbreak in social unrest.” Moscow has been able to exploit this advantage and has succeeded in inviting large investments by foreign energy companie--- $4 billion by the French firm Total and $7.8 billion by BP. It is also working on building two gas pipelines that will carry its gas under the sea to points of consumption in Western Europe. And, after three years it has begun to add to the accumulated $50 billion in its sovereign wealth fund. It would not be inaccurate to suggest that the Middle East’s loss is Russia’s great economic and strategic gain.

Among the many different ways in which the turmoil in the Middle East is likely to affect the global and economic landscapes, one that is of immediate consequence is the turbulence in the oil market.The affect of this on Pakistan will be severe, a possible repeat of the balance of payments crisis of 2008.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Entrepreneurship as driver of growth[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 21 March, 2011[/B]

WITH Pakistan being the poorest performing economy of South Asia, is there something the policymakers in Islamabad and the provincial capitals could do to get the economy moving again?

In fact, there is something that can be done by the state to revive the growth process. It is about the role entrepreneurship can play in reviving and developing the economy and, in the process, developing the underdeveloped Pakistani firm.

Initially the developing world relied on their governments to create the environment which would make possible the transfer of workers from low productivity activities as well choose the activities in which these workers would get engaged. India under Jawaharlal Nehru, the country’s first prime minister, became the most articulate advocate of what can be called the “state-led model of economic growth.” With many regime changes, Pakistan wavered between the approach to put the state on the commanding heights of the economy, and the approach to free private entrepreneurs to work on their own without too many restrictions placed in their way. It is the latter approach that is now at the centre of what is called entrepreneurship-focused model of development. In this model the kitchen is left in the hands of the private sector to mix the ingredients for growth in the way that is the best to produce the best results. What good entrepreneurs do is to develop “production recipes”.

The “recipe” metaphor was used recently in a report done by group of consultants for the Planning Commission. Professor Philip Auerswald of George Mason University who headed the team explains that in traditional development economics the emphasis is placed on inputs and outputs – so much labour and capital need to combine to produce so much output – but not on the “recipe” that will turn the inputs into outputs. It is the recipe that really produces growth at the margin.

He calls this the “production recipe” to distinguish it from the “production function” of growth economics. Even though in recent years other variables such as human development, technological improvements, and institutional capacity have been brought in directly into the production function, there is still not the full recognition that it takes individual firms to play the role of a chef to produce the best meal out of the available ingredients.

Firms only exist when the cost of doing business is reasonable and what economists call “transaction” costs are not excessive. If these are high as can be the case when the political and bureaucratic systems suffer from a great deal of corruption, or when the state of infrastructure is poor, or when the regulatory system is very demanding, efficient firms will not develop. Too much entrepreneurial energy will be spent on dealing with these distractions in the production process. These are Pakistan’s conditions today; resolving them would help entrepreneurship to play an important role in economic revival and growth.

Auerswald also maintains that the growth of an economy usually means growth of firms and only those firms be come growth oriented when they work on their recipes to improve the efficiency of the production process as well as the quality of the output being produced. There are three different ways in which ordinary firms become growth firms.

First, they make modifications to the existing production recipe. This they do by learning from their own experiences. Second, they create their own recipes. This requires investment in research and development and, of course, entrepreneurship. Third, when an environment is created that allows the entry of new firms that bring in new ideas while encouraging the exit of those that have lost the cutting edge because they are set in their own ways. At the margin, much of the growth that occurs comes about because of the entry of new firms.

If it is expected that a growth strategy must give considerable attention to the development of firms, what are precisely the policy options the state must emphasise. Here some international experience should help to point to some of the areas of considerable importance to forge ahead. The first is investment in the development of human capital, a neglected area in the country.

Those who study China’s extraordinary economic growth since 1979 when the reformist Deng Xiaoping established his control over the Communist Party and thus over the country, should recognise that he would not have been able to achieve his miracle, unless Mao Zedong had not prepared the Chinese population to develop themselves and the economy in which they worked.This was done by providing universal education and healthcare and by liberating women. That said Deng would not have achieved the remarkable transformation of the Chinese economy had Mao not preceded him.

If the development of human resource is critical for the development of the firms, it will need the expenditure of enormous amount of resources to close the gap that exists in Pakistan in terms of what needs to be done in this area and what has actually been accomplished.

While the state’s performance has been weak, the private sector – often led by entrepreneurial women – has done very well. The Beaconhouse is said to be one of the largest schooling system in the world. This is a classic case of entrepreneurs improving the production recipe to provide an output with high demand. In their case, the demand is by the large middle class for quality education that is not provided by the public sector. The Pakistani state stood aside and let these systems develop.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Improving governance to produce growth[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 28 March, 2011[/B]

PAKISTAN’s economy has currently settled on a low-growth path. The average rate of GDP increase from the time the country become independent to the present – a period of almost 64 years – was five per cent a year. As a result, the economy is 19 times larger than the size with which it was born.

Since the population during the same period increased at an average rate of 2.6 per cent per annum, income per head of the population grew by a 2.4 per cent a year.This was a respectable rate of increase in personal income which allowed the country to keep a much smaller proportion of a considerably larger population out of poverty.

There are no reliable estimates of the number of people who were absolutely poor in 1947 when the country was born. What is known though is that the areas that currently make up the Pakistani state were much poorer compared to those that became independent India. Then, the proportion of the poor in the population of British India was estimated by economists at 40 per cent.

It was in fact, this number that led to the expression “the bottom 40 per cent” to refer to the society’s poor. Given these estimates, it would not be seen as an exaggeration to suggest that at the time of its birth some 55 to 60 per cent of the population of 30 million – or 17 to 18 million people were absolutely poor at the time of the country’s birth.

A number of estimates are available for the current level of poverty in the country. If we settle for a proportion of 35 per cent of a population of 180 million in 2011, the size of the pool of poverty can be said to be 66 million. In other words, the population since independence has increased six-fold while the pool of poverty has grown four-fold. Therefore, in broad historical terms, Pakistan’s economic performance if viewed in the context of its impact on poverty can be viewed as satisfactory – but not outstanding.

Growth is essential for the alleviation of poverty. Empirical work done at the World Bank indicates that the rates of increase in GDP need to be twice as high as the rate of increase in population for the proportion of the poor to remain about the same. It could be a bit higher if the distribution of income is more skewed than is normal for developing countries. It could be lower if the national income is more evenly distributed.

For a significant charge in the incidence of poverty to occur, the rate of increase in GDP has to be at least three times the rate of growth in population. Applying these ratios to Pakistan’s case, a GDP increase of four per cent a year (about twice the increase in the rate of population) could keep its incidence of poverty at about the same level as it in today – about 35 per cent. Anything lower would increase the incidence, anything higher would result in its reduction.

An urgent task before the policymakers, therefore, is to reverse the current trend and get growth going again.

What are the determinants of growth has been and continues to be a subject of central interest for those who are pursuing the disciplines of growth and development economics. In Pakistan’s case it is well understood that the economy must save more and invest more in order to get sustained growth embedded in the economic system. It is also now realised that by improving the quality of human capital it is possible to get more growth out of the same amount of investment.

It is possible to lower the incremental capital out ratio (ICOR) – the percentage of national income that needs to be invested to produce one percentage point of increase in gross domestic product – by introducing efficiency into the production system. The production system becomes more efficient if transaction costs are reduced, by allowing inefficient firms to exit and by allowing new firms to enter. It is also important to improve the technological base of the economy.

For that to happen the state must invest more in education and also provide resources for activities that go under the name of research and development. Finally, there is a positive relationship between the ratio of trade to gross domestic product and the rate of increase in national income.These are all some of the elements in growth economics. When the state promotes all of them simultaneously the result can be very rewarding. It is the emphasis on these factors in the production function that produced some of the many miracles in East Asia.

However, somewhat less understood is the relationship between the quality of governance on the one side and growth and poverty alleviation on the other. That good governance is essential for promoting growth, alleviation of poverty and improving income distribution is a realisation that has come only recently to development economists.

Numerous indices (developed by the World Bank) into which the term governance has been divided, can be assembled into essentially three categories of activities: responsibility, deliverability and accountability. The extent of the state’s responsibility for delivering services differs, determined by tradition, history and how effective are people in exercising their influence on policymakers.

Generally the failure of nonstate institutions to deliver what people desire leads to an extension in the reach of the state. The reverse is also true as the failure of the state to provide what were once regarded as its core functions were taken over by non-government institutions.

In most of mainland South Asia - but in Pakistan in particular - the private sector has stepped in to provide quality education to the segments of the population that have the means to pay for it. Where such means were not available, religious schools-generally going by the name of “madrasses” have become active.

Consequently Pakistan now has a segmented educational sector with the public sector catering for the needs of three-fourth of the school-going population, privatesector schools serving a fifth of the population and religious seminaries taking care of the remaining five per cent. This division of responsibilities will have serious social, political and economic consequences. Some of these have already begun to manifest themselves.

Currently Pakistan is poorly governed. A strategy aimed at improving growth performance of the economy must direct its attention to improving these three dimensions of governance. Failing to do that would mean that the resources of the state would be largely wasted, the rate of growth will remain sluggish and incremental income would continue to be distributed inequitably. If this happens over an extended period of time the result can be the types of revolutions we have seen erupting on the Arab streets.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Will Japan’s tsunami wave hit Pakistani shores[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 04 April, 2011[/B]

WILL the tsunami waves unleashed by the giant 9.0 earthquake in Japan reach Pakistani shores? Not in the literal sense. The waves died out quickly doing little physical damage outside Japan. But they produced another kind of turbulence that will surely affect Pakistan as the viability of the atom as the source of electric power begins to be questioned once again.
Pakistan facing a serious power crisis that has already taken a heavy economic toll was depending on the development of nuclear power to increase generation and thus close the severe demand-supply gap that has proved to be so difficult to overcome. Of the three domestic sources of energy available, one (gas) is being rapidly exhausted, the second (hydro) is proving difficult to exploit for political reasons, and the third (coal) faces numerous environmental problems.

Nuclear energy seemed like a good option until recently when the 40-year old reactor at Fukushima was hit by the earthquake and inundated by the tsunami waves. It had to be shut down. How much health damage it has done to the Japanese who came in the way of the radiation produced by the troubled reactor will not be known for years. What is known is that the viability of nuclear power is being questioned all over the globe. This has happened before.

After the “Three Mile” accident to a reactor in the United States (it happened in 1979) development of nuclear power for civilian use was slowed down. Confidence had begun to return when Chernobyl happened in the Soviet Union in 1986.The Russian accident was much more serious as was its impact on the development of the nuclear industry.

The medium to long-term impact on the future of the nuclear energy will depend on two things. First, how fast cooler and more rational heads prevail over those who are currently in a state of hysteria. The first reaction came from conservative countries such as Germany that ordered that seven of its old reactors should be immediately slowed down. Even Beijing temporarily suspen ded the approval of new nuclear reactors.

In this environment it was not easy to point out by those who look at the environmental advantage, that even under the worst case scenario, the number of deaths from Fukushima will be less than the lives lost every year because of the health problems caused by coal-fired electric plants. Coal mining accidents killed 2,400 people in China alone.

For Pakistan, the only silver lining visible in this very dark cloud is that it had turned to China as a supplier of nuclear energy. Chinese built reactors are already operational at Chasma and more are on the drawing board. During one of the many visits President Asif Ali Zardari has paid to China, the two countries signed a memorandum of understanding which, if fully implemented, will have nuclear power become a major source of energy supply.

The silver lining in the dependence on China is for the fact that for all the countries exporting nuclear technology, China appears to be the most advanced in terms of making the science and engineering behind the reactors safer than it is today.

The new technology being developed in China will be used in two reactors on a peninsula jutting into the Yellow Sea. The authorities are confident enough that this will be a much safer way of producing nuclear power than turned out to be the case in Fukushima-Daiichi types of machines. The crippled Japanese reactor used tightly packed fuel rod assemblies each with about 180 kilograms of uranium.

These packages were generally cooled by water and once the fuel was spent they were kept for hundreds of years at what were considered to be safe sights. The design used by the Japanese at Fukushima had two defects that were not present in later reactors. The backup generators used for pumping water into the reactor were located in the basement and therefore easily inundated once the tsunami water rushed in at great speed. The second problem was that the spent fuel was stored on top of the building which made it exceptionally vulnerable if the building itself got compromised.

The Shidao plants are being built by the state-owned Huaneng Group, the biggest Chinese electric company. It will attempt to prove that the technology can work on a commercial scale. Each plant can meet the power needs of cities with population of 75,000 to 100,000 people at the United State’s level of consumption.

The new Chinese design uses small uranium balls rather than rods as the core of the reactor. Thousands of balls will be used, each with its own graphite packing which will prevent radiation from leaking even in the case of a malfunction.The reactors will also be cooled by a non-explosive helium gas instead of relying on a steady flow of water.

The technology behind the new reactors has been known for a while. Called the pebble-bed reactor approach it was experimented with by Germany, South Africa and the United States but was not developed. It was a costly machine. However, there is virtual consensus among nuclear experts that the technology works better than the conventional one and produces more manageable waste. The spent balls are considerably less radio-active than the rods and can be disposed off in the sites near the plants. The experiments outside China were not continued since the private sector was not prepared to outlay a large amount of capital that may ultimately not yield economic results. Financially rich China has taken care of this problem by coming in with massive support. The government has paid for the entire research and development bill and will pay an additional 30 per cent as subsidy for the capital cost of building the plants.

China now has the world’s largest nuclear reactor building plans in the world. As many as 50 new reactors will be built, mostly of the conventional design. But if the pebble-bed approach works a larger proportion of the plants will be of the new variety. Western opinion about the Chinese approach is generally positive.

“China epitomises the stark choices that we face globally in moving away from current forms of coal-based electricity”, says Jonathan Sinton, the top China specialist at the International Energy Agency in Paris. “Nuclear is an essential alternative to coal. It’s the only one that can provide the same quality of electricity at a similar scale in the medium and long-term”.

While locating the new plants the Chinese are being cautious, having fully imbibed the lessons from the Three Mile and Fukushima accidents. The authorities have ordered that all nuclear plants be located at least 50 kilometers from the nearest city. Chinese nuclear safety agency met after the incident in Japan and reviewed the Shidao plant design as well as its siting. They have given the goahead for construction work to proceed.

Since one is not privy to the on-going discussions between China and Pakistan on the nature of the former’s promised assistance to the latter, it would be prudent for Pakistan’s Atomic Energy Commission to look again and with considerable care at the programme of Chinese assistance.

It would be wise to include one of the pebble-bed reactors among those headed eventually Pakistan’s way. Joining the Chinese even at the experimental stage of the development of this breed of reactors would help the Pakistani engineers and scientists to gain enormous valuable experience.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Growing worries about[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 11 April, 2011[/B]

THERE appears to be a slight break in the rate of increase in the level of prices in recent weeks. But it is not significant enough for the policymakers not to worry about the prospect of increasing inflation.

A small increase in the level of prices is expected and is healthy for the economy. It leads to a better allocation of resources within the economic system. What is not healthy is a persistent increase in prices with an upward trend. This is has been the case in Pakistan and should be a matter of concern for the policymakers in Islamabad as well as those who manage the central bank.

There are several reasons for the increase in prices. These can be caused by disruptions in supplies. This is what happened during the floods of last year when the damage to the infrastructure made it difficult to transport goods from the points of production to those of every day consumption.

Supplies may also be affected if a crop that is an important source of consumption suffers from an unexpected decline in production. This could be caused by floods as hap pened last summer.

But it could also result from disease and pestilence. This occurred in the early years of the rule by General Zia ul Haq. In these supply related reasons for inflation, the country can bring in imports if it has the resources to purchase them. This is what was done by the Zia government which not only bought wheat from abroad but set up a new body for hauling it to the major centres of consumption. Thus was born the National Logistics Cell which was established by the military and managed the task of transporting more than a million tons of wheat upcountry.

The NLC went on to become not a major road haulage company. It has also become a large road construction enterprise. The Lahore ring road, for instance, is being constructed by NLC.

Inflation can also result from the stimulation of domestic demand. This normally happens when the governments run large fiscal deficits and finance them by borrowing from the central bank which in turn uses the printing press to print money. This is what is occurring at this time.

Consumer prices increased by 12 per cent in the financial year 200708, the last year of the Musharraf period, and then again by 20.8 per cent in 2008-09, the first year of the democratic government.

The level of price increase moderated in 2009-10 when it was estimated at 11.7 per cent but picked up once again in the first six months of the current financial year. There were different reasons for these price movements and it is worth recalling them in order to draw some public policy lessons from them.

The price rise in the waning days of the Musharraf period was because of the loosening of the fiscal purse strings by the government and the use of cheap money to stimulate domestic demand. This was the classic approach of a government preparing for elections.

Musharraf’s financial and political advisors thought that by creating a sense of prosperity among the people it would be able to persuade a large segment of the electorate to cast votes for the ruling party, the Pakistan Muslim League (Q). That did not happen and the opposition triumphed, using the need for the country to return to democracy as a more powerful tool than perceived economic wellbeing.

The successor government inherited a difficult economic situation, the consequence of the poor management of the economy by the previous regime. Whether it would have been to stabilise the economy is debatable; before it could settle down Pakistan was hit by one of the sharpest increases in commodity prices the world has experienced in recent years.

The international increase in prices was led by oil, an extremely important commodity for Pakistan. The price of oil climbed to unprecedented levels and Pakistan found that it was rapidly running out for foreign exchange reserves in order to meet the ever-increasing import bill. Islamabad turned to the International Monetary Fund when the fear grew that it may not be able to meet with its foreign obligations.The Fund, which had received a large infusion of finance to handle the problems faced by countries such as Pakistan, obliged by signing a very large Standby Arrangement with Islamabad. The SBA came with the usual conditions, among them the need to reduce the fiscal deficit.

This was necessary, as indicated above, to prevent the government from having the State Bank run the printing press. Some of the IMF-induced fiscal discipline helped to moderate the price situation. There was also help from the international side, as the price of oil declined almost as rapidly as it had increased.

The current inflationary situation is the result mostly of a political environment which, the rulers believe, severely limits their options. They are of the view that the reform of the tax system which is essential to place the government’s finance in order cannot be put in place without disturbing the fragile coalition that governs the country at this time.

Among the measures that need to be adopted include taxing agriculture. This is one of the largest sectors of the economy. It is scandalous that income from it is not being taxed. ZA Bhutto’s decision to tax farm incomes was annulled by Ziaul Haq.

Services are proving difficult to tax since the provinces argue that this should be their revenue to collect. The rich either manage to escape paying taxes or ensure through pressure to keep their assets outside the purview of the tax authorities. It is because of this that owner-occupied houses are not taxed, why capital gains are tax exempt, why the Musharraf administration abolished wealth tax, and why the items of consumption by the rich are kept out of tax net.

Ultimately the rich by lightening their own burden shift it to the poor. Low tax-to-GDP ratio hurt the poor in many ways. Of these two are important. The government is unable to provide them the services the poor need. This is one reason why the quality of education and health care provided to the poor by the state in Pakistan is of such poor quality.

Also, as discussed above, a cashstrapped government tends to run to the printing press to provide itself with the money it needs. This results in inflation which, in fact, is a tax on the poor. Another way of looking at rapidly increasing prices is to see it as an erosion in the incomes of the poor.

The thrust of the argument made here is that the government has many reasons for being concerned about inflation. If it persists it produces inflationary expectations which builds price rise into human behaviour. Once that occurs it is difficult to get it out of the economic system.

Also, by reducing the real incomes of the less advantageous, it causes great resentment which could lead to political explosion on the streets that is rocking the Middle East at this very moment.

By not addressing the problem of inflation by improving the tax system since such a move would not be supported by the well-to-do, the policymakers are inviting another political problem: the wrath of the poor.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Shaping economy in times of crises[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 18 April, 2011[/B]

PAKISTAN today is passing through difficult times. With the rate of growth plunging to 2.5 per cent, there will be a significant increase in the incidence of poverty. Perhaps another six to seven million people will be added to the pool of poverty.

However, in a recent press statement, President Asif Ali Zardari said that his government had managed to stabilise the economy. As evidence in support of this view he spoke about the extraordinary increase in exports and remittances as well as the build-up in foreign exchange reserves. These developments have indeed taken place but do not signal that the economy is out of the woods.

Where will Pakistan go from here? The Institute of Public Policy at Lahore has constructed an econometric model to draw up some scenarios for its annual report to be released on April 25. Of these, two scenarios are presented here to set the stage for policymakers to contemplate adopting an approach that would help the economy move in the right direction.

In the best case scenario, Islamabad undertakes major tax reforms, starting with the budget of 2011-2012 which includes introduction of a comprehensive reformed general sales tax, the RGST. This means withdrawing all exemptions on goods and eliminating all distortions that have crept into the current system.

Wealth tax will be reintroduced and a strong effort will be made to curb tax evasion. These measures will be seen as making the system more equitable and should improve compliance. Provincial sales tax on services will be broadened and the provinces will develop their tax systems to generate more resources from within their economies, taking advantage of some of the provisions in the 7th National Finance Commission Award 2009.

On the expenditure side, the best case scenario focuses on improving working of large lossmaking enterprises, on eliminating the problem of “circular debt” that is constraining the supply of electric power from existing capacity, and a careful review of public sector development programme by placing emphasis on completion of high priority projects. These measures will bring about a significant improvement in the govern ment’s financial situation.

Within the context of monetary policy, the best case scenario assumes that the State of Bank of Pakistan will have the autonomy to order its policies with the objective of containing inflation and not meeting the fiscal deficits of the federal government. The SBP will back off from the printing press and let the government finance its operations by increasing tax revenues and by going to the market to raise additional money. The central bank will also let the market determine the exchange rate.

This package of measures will have a number of positive consequences including the resumption of tranche release by the International Monetary Fund, Pakistan’s return to international capital markets, increase in foreign direct investment, and resurgence in business confidence.

With the pick up in the rate of economic growth and increase in government revenues at the central and provincial levels, new fiscal space will be created so that there is significantly greater focus on social development and social protection policy. On the external side, there will be considerable improvement in the rate of growth in trade.

This model estimates the real GDP growth increasing from a low of 2.2 in 2010-11 to 6.5 per cent four years later; the rate of investment increasing from 12.5 to 25.1 per cent of GDP; the rate of inflation dropping from 14.2 to 9.8 per cent; and the fiscal deficit declining from 6.2 to 3.6 per cent.

The worst case scenario produces a particular ly grimmer picture of the economy. It is based on the assumption that the policymakers will not gather the political will and the required support to introduce the proposed policy changes; allow further deterioration in the quality of governance to take place, further decline in the delivery of public services to the citizenry including those provided by the large state-owned corporations, and greater economic isolation of the country. There will be haemorrhaging of foreign exchange reserves due to a sharp increase in the current account deficit.

By the end of 2012-13 foreign exchange reserves could reduce to the level equivalent to only two months of imports. There could be a serious financial crisis by the second half of 2012-13, on the eve of the next set of general elections.

According to the worst case scenario, the rate of GDP increase is only two per cent in 2011-12, increases to 3.3 the following year, only to drop to 2.8 per cent in 2014-15. The rate of investment declines from 11.5 to 8.5 per cent; the rate of inflation increases from 14.5 to 20.1 per cent; and fiscal deficit grows from seven to 7.6 per cent. Real exchange rate drops from Rs92.7 to the dollar to Rs133.2.

These illustrative scenarios raise the question of probability. What is the likelihood that the political system will have the wherewithal to introduce the reforms needed to move to the best case scenario? Or, conversely, will the policymakers, not recognising the consequences of inaction, allow the policy environment within which the economy is working to further deteriorate?

It is not likely that the stakeholders within the system will have the will or the interest to adopt the measures spelt out in the best case scenario unless they are pressured by circumstances that threaten their hold on power.

One type of pressure that could build up has brought about significant change in the structures of politics in some of the countries of the Middle East. The explosion on the streets of that part of the world happened unexpectedly; it reflected the frustrations of the citizenry with the political and economic systems under which they were kept for decades.

Some of the recent developments suggest that building blocks have been gathered that could allow the construction of a political structure that will be more responsive to the needs of the people.

The most important building block is the passage of the 18th amendment last year and the speed with which it is being implemented.

The 7th National Finance Commission award of 2009 is another part of the foundation that is being laid. If done with appropriate care, the intended devolution will bring government closer to the people.

Economists have long recognised that good governance means a government that is not too distant from the people it is intended to serve. In other words, there is much that remains to be done before the government can claim – as President Zardari did the other day – that the economy has been stabilised.

[B](The writer is chairman of The Institute of Public Policy, Lahore.)[/B]