[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Devolution and regulatory changes[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 25 April, 2011[/B]

FOR a country of its size and level of development, the regulatory system of Pakistan is underdeveloped. There may be a further setback if the process of devolution does not pay special attention to it, carefully distinguishing between the functions that can only be performed at the federal level from those that can be more efficiently carried out by the provinces.

This division of responsibilities will require an understanding of the initial impulses that led to the creation of the system in the first place and whether the system meets the current needs.

The system of regulation has evolved over time in response to several different compulsions. Citizenry demands, however, were seldom the main force behind regulatory changes and development. The reason for this is that Pakistan compared, say to India, took much longer to develop a representative system of government. Consequently, people’s needs were not fully reflected in the regulatory system. This is likely to change with the devolution of authority to the province under the 18th amendment.

Even at the risk of some simplification, it will be useful to identify the main pressures that have produced the current system of regulation before discussing how the system could be strained by devolution. The regulatory system can be divided into several parts. Each of these was put in place in response to different sets of imperatives.

The oldest regulatory system is managed by the provinces and regulates both the sector of agriculture as well as commerce involving agricultural produce. Laws such as the various agricultural marketing acts in the provinces are based on the 1929 legislation put on the books by the British colonial administration.

The main purpose behind them was to protect the Muslim peasantry from what were seen as the predatory behaviour of Hindu money lenders and middle-men. That reason is long gone – the nonMuslim operators in the sector of agriculture left Pakistan for India soon after the British decided to partition the sub-continent on the basis of religion – but the acts continue to regulate agricultural commerce in a way that has seriously inhibited the development of free markets.

Regulatory systems, if not kept under constant review, can attract vested interests as well rent seeking by the regulating agencies. The passage of the 18th amend ment has provided an opportunity for that review.

The second set of regulations also concern the sector of agriculture. These date back to the mid-1950s when Pakistan for the first time became a food deficit country. The government stepped in and set up mechanisms to regulate commerce in food grains and cash crops. The price of some of the commodities deemed to be essential – in particular wheat – were regulated indirectly by fixing the price at which government would acquire the surpluses for sale by the farmers.

Initially, capacity for storing wheat procured by the government was created. Later the government established its monopoly over international commerce in wheat and rice.

Trading Corporation of Pakistan is in international trade. The system has continued with the government influencing production and trade in wheat, the country’s most important crop. It announces the procurement price of wheat at the beginning of the growing season.

Banking regulation and regulation of the non-banking sector constitute the third pillar of the regulatory system. While the responsibility for overseeing commercial banks rests with the State Bank of Pakistan, non-bank institutions are regulated by a number of agencies with varying degrees of autonomy.

The regulatory system went through enormous expansion when the government headed by Prime Minister Zulfikar Ali Bhutto (1971-77) decided to expropriate large private businesses in the sectors of industry, finance and commerce.

Under Bhutto, the government also decided to improve the working conditions of the labour employed in the formal sectors of the economy. This was to be done in part by instituting laws pertaining to hiring and firing of workers, minimum wages and old-age pensions, and health care.

The pension systems to which both the workers and the employers contribute have accumulated large financial assets which are tapped by the federal government for the purpose of raising general revenue. The ownership of these funds will be a contentious issue as the process of devolution proceeds.

A number of laws concerning labour welfare have accumulated on the books. The attempt to consolidate them into one piece of legislation has not advanced because of the indifference of the provinces. This is one area where devolution might bring rationality into governance but there is also the danger that it might lead to fragmenting the labour market with adverse economic consequences.

The corporate sector was poorly regulated for decades. It was only in the early 1990s with the privatisation of the industrial and other assets nationalised in the 1970s, that the need arose for regulating enterprises in the private sector.

In this context, two agencies were established. The Security and Exchange Commission, established in 1997, regulates the entry and exit of private enterprises from the economic system while the Competition Commission, as the name suggests, ensures that companies operate in a competitive environment. These regulating agencies will continue to function at the federal level even after the process of devolution has worked its course.

In the public utilities sector, it is only for the enterprises involved in various aspects of electricity – generation, transmission and distribution – that a regulatory framework has been established. However, since these enterprises remain in public domain, the state continues to intervene.

Initially, the National Electric Power Regulatory Authority, established as a part of the reform effort launched in 1992, was mandated, among other things, to fix tariffs for various types of consumers. It has been only partially successful in this area. The government continues to intervene, one reason why what is called “circular debt” has become such a major fiscal problem.

It is in the area of delivery of social services that the regulatory system will come under stress as result of devolution. There is already considerable uncertainty as to the locus of responsibility with respect to the functions the federal government has performed in the sectors of education and health. The Higher Education Commission has the responsibility for developing curriculums for institutions operating in the sector.

The decision by the Implementation Commission to devolve the HEC has been challenged in the Supreme Court which has instructed that the process initiated as a part of the devolution should be put on hold pending further review. Similarly the decision to devolve the ministry of health may affect the various drug laws on the books as well as the country’s international obligations for controlling the spread of various diseases.

Pakistan is also committed to the various Millennium Development Goals. It is not clear how this commitment will be met if all the functions of the health ministry are devolved to the provinces. For the moment the provinces are reviewing the various laws and regulations for which they will have the responsibility under the 18th amendment.

Environment is another area that is likely to be affected by devolution. Although there is a ministry responsible for the sector and although there are laws and regulations administered by the provinces to regulate the environmental aspects of industrial production and commercial operations, protection of environment has not received the attention it deserves. There is a real danger that this function of the government may suffer from further neglect as result of devolution.

It would appear that the impact on the nascent regulatory system of devolution has not been fully appreciated by those who are responsible for implementing the process. One likely consequence is that in some areas, particularly in the area of delivery of social services, there may be some set back as the provinces begin to reflect on their own regulatory requirements in developing their system. In several cases, federal competence and ability must be maintained to ensure that there is a regulatory framework to enforce standards across the country.

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

[B]By Shahid Javed Burki
Monday, 09 May, 2011[/B]


UNLESS a significant reform of the economy is undertaken and the current trends are reversed, Pakistan’s dependence on external finance will increase with time.

The tax to GDP ratio has declined to the point at which the government is now dependent on foreign loans even to finance current expenditure. What this implies is that policymakers have to pursue foreign relations with an eye on what is expected of them by the countries and development agencies which provide needed cash.

Given this dependence, one would expect that Islamabad would seek admission into forums where important decisions concerning economic relations among large countries get to be taken. That, unfortunately, is not the case. Islamabad has done a poor job of advancing its case for inclusion in these deliberative bodies. Two of them are particularly important – the groups known as the BRICS and the G20.

BRICS as a group owes its existence to a study done by Goldman Sachs, the American investment bank, some years ago. The aim of the study was to see how the structure of the global economy was changing by the rapid growth of some of the large emerging markets. The researchers focused on the four largest and concluded that the center of gravity of the global economy would move away from the Atlantic to the Pacific.The acronym BRICS originally stood for Brazil, Russia, India and China. “S” was added to indicate that it was a plurality of countries that were represented by the acronym. Recently, however, South Africa was added to give the grouping a regional balance. BRICS now stand for five countries.

The BRICS as a group lacks balance. Two of its five countries have more than a billion people each; China has a population of 1.396 billion while India has 1.294 billion people. South Africa has the smallest population of the five with only 51.7 million. If the size of the population was the criterion, Pakistan with close to 180 million should be a member. Russia with 138 million has a smaller population than Pakistan and Brazil with 203 million people is slightly more populous than Pakistan.

In terms gross national income, four of the five BRICS have trillion dollar economies – China with a GNI of $5.095 trillion is the largest, followed by Brazil with $1.632 trillion, India with $1.527 trillion, and Russia with $1.289 trillion The size of the South African economy, is not much smaller than that of Pakistan’s. In other words, Pakistan could have been admitted into the group but for the poor reputation it currently enjoys in the international community. The reputation suffered a further blow with the discovery of Osama bin Laden in a safe house in Abbottabad. The same is true for the G20 which also excludes Pakistan.

The group held a summit at the resort town of Sanya in China’s Hainan province on April 14 and issued a wide-ranging communiqué. Keeping in mind the concern of rich countries that the global economy was not in balance with China and some East Asian countries running large trade surpluses while America and Europe were faced with corresponding deficits, the BRICS asked that the international community should work together to increase production capacity, strengthen producer-consumer dialogue to balance supply and demand while increasing support to developing countries.

It said that the governing structure of the international financial systems should reflect changes in the world economy and increase the voice and representation of emerging economies as well as developing countries. This demand was made at a critical time as the IMF begins the search for a new person to lead the institution since the current incumbent is contemplating to run for the French presidency. Among the people being talked about to lead the Fund is Montek Ahluwahlia of India who has worked in senior positions at the World Bank as well as the IMF and is currently the deputy chairman of India’s powerful Planning Commission.

The Sanya summit reached beyond economic matters and reflected on the situation in the Middle East and North Africa. The communiqué expressed a deep concern about the developments in the two regions and said that the use of force should be avoided in resolving turbulence. Both China and Russia had abstained when the United Nations Security Council passed the resolution that authorised action against the Libyan regime of Muammar Gaddafi. Two of the five BRICS members – Brazil and India – aspired to become perma nent members of the Security Council. With this in view the summit reaffirmed the need for a comprehensive reform of the U.N. including its Security Council to make it more effective, efficient and representative. This was needed to better deal with current global challenges.

The leaders at the summit devoted most of their time to financial and monetary issues. They welcomed the discussion of the role of the special drawing rights, the virtual currency used by the International Monetary Fund., in the international monetary system. It expressed the wish that the basket of currencies used to determine the value of the SDR should now have larger weight of the currencies of the major emerging countries. There was a hint that the BRICS leaders were urging a move away from the American dollar as the international reserve currency. The summit also called for further international financial regulatory oversight, strengthening policy coordination and promoting sound development of global financial markets and banking systems.

A couple of days after the Sanya summit, the G20 finance ministers and governors of the central bank met in Washington. They decided to authorise the IMF to bring to the attention of the international community countries that had drifted away from the path of sound economic and financial. Nations will be evaluated on their government debt (large in the case of Pakistan), private savings (low in the case of Pakistan), trade balance (for the moment acceptable in Pakistan’s case) and flow of investment (low in the case of Pakistan).

Over the coming months IMF officials will seek to determine which countries are in some basic way out of balance with the rest of the world – consumption out of whack with output (as is the case in Pakistan), or savings levels from the amount of investment (once again as is the case in Pakistan).

“We have the framework and we have the process by which policies can be scrutinised”, Christine Lagarde, the French finance minister and leader of the G20 finance ministers this year said in a news conference in Washington. Between now and next G20 meeting in October at the time of the annual conference of the World Bank and IMF, analysis will be done on which large economies have imbalances.

While Pakistan may not make it to the first list of countries to be looked at, it will come under the microscope soon after , perhaps at the time the country is heading for another set of elections. While it has been possible to dodge the pressure of the IMF to introduce serious structural changes in the economy, international opprobrium may be harder to deal with. This will be the case in particular when those who will point a critical finger at Pakistan will also include China, now the largest single benefactor of Islamabad.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Some easing of the energy bind[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 16 May, 2011[/B]

PAKISTAN’S economy comes under a great deal of stress whenever the international price of oil increases.The economy’s vulnerability to oil prices would be less severe, if these prices did not fluctuate as much as they have done in the past several years.

The fluctuations are the result of the way the markets read the supply and demand situations. The prices increase sharply whenever there is fear that supplies may be disrupted. There was great apprehension, for instance, that the explosion on the streets of the Middle East could reach Saudi Arabia and Kuwait. There was also considerable apprehension about the way the Japanese government was likely to react to the accident that disabled one of its nuclear plants. Each Japanese pronouncement produced a jump in the price.

The latest indication that Japan is likely to give a lower priority to nuclear energy rather than let its share increase from 30 per cent of total supply to as much as 50 per cent over a couple of decades caused another spike in the price of oil.

There was, as a result, great stress on the markets and the price of oil increased to $125, doubling within a matter of a few weeks. It fell back to less than $100 when it appeared that the oil exporting countries may be able to keep at bay the rising the tide of political discontent. It has begun to increase once again as uncertainty about Tokyo’s future plans increases.

These wide swings hurt a country such as Pakistan which is dependent to such extent on imported energy to keep its economy working.

Energy prices also increase when the markets assume a significant increase in demand. This was the case when the Chinese economy was growing rapidly and its dependence on imported energy was increasing. With Germany having closed some of its nuclear plants following the accident in Japan, the demand for energy produced from conventional sources has increased. Germans are importing electricity from the Czech Republic which relies mostly on coal as the source.

In other words sharp fluctuations in the price of oil not always caused by sudden and real changes in supply and demand but by the way speculators read the market’s future.

Policymakers in Pakistan have given little attention to developing an energy policy that aims to factor in country’s own resources as well as the impact of electricity and gas tariffs on the pattern of consumption. There are several consequences of this neglect. One of the more important one is that the country has become increasingly dependent on imported fuel for generating electricity. The other is that a much larger proportion of total energy supply is consumed by households than is normally the case for countries at Pakistan’s stage of development. In Pakistan productive sectors of the economy in fact subsidise domestic consumption.

In planning for the future, it is important to take into account some of the recent developments in the sources of energy across the globe. In this context, one important development is worth noting. This is the likely exploitation of what is called “shale gas” for commercial use.

Across the world coal, oil and natural gas remain the source for more than 80 per cent of all primary energy demand. Coal is the largest source, accounting for 50 per cent of the total supply. The three largest energy markets – the United States, China and India – all depend on this source for the bulk of their supply. Nuclear power accounts for another six per cent. Renewables add another two per cent but their share is likely to increase to seven percent by 2035.

The good news for countries such as Pakistan is that some recent developments may ease the pressure on supply and thus put a lid on the rise in the price of oil and also reduce fluctuations in price.

A recent survey by the United States Energy Information Administration has had a profound impact on market sentiment by suggesting that recoverable shale gas may add significantly to the supply of natural gas. Shale is a form sedimentary rock previously considered all but worthless. The rock in fact is ossi fied mud from the beds of ancient seas. The gas trapped in it can be recovered by hydraulically fracturing the rocks that contain it.This involves blasting the rock with water, sand and chemicals to create cracks through which the gas can flow.

However, the process produces water with toxic substances and has generated significant environmental opposition to the widespread use of the technology. Companies interested in exploiting this resource are now working on containing the environmental damage this developing technology could cause.

Recent advances have made the use of this technology possible. Gas can be extracted at affordable costs. The American study estimates for the first time technically recoverable shale gas for 32 countries. The amount of potential supplies was estimated at 6,600 trillion cubic feet. This will add 40 per cent to the word’s current estimates of gas reserves. This technology is already being used in the United States; production of shale gas has increased 12-fold in the past one decade. This has dramatically altered energy prospects for the country. Not long ago, it was assumed that the United States would become a net importer of natural gas; now some companies are working on the possibility of exporting it. One company has invested large amounts of money in building a storage facility in Texas that may be put to use once pipelines have been constructed to bring the gas to the coast.

Today just three countries – Russia, Iran and Qatar – hold 54 per cent of the world’s conventional gas reserves. The Russian dominant position has meant that Moscow has been able to dictate the price of the commodity. But shale is found in many other places, including Eastern and Western Europe, India, China and Australia.

There is some likelihood that Pakistan’s Balochistan and Sindh provinces and the Punjab’s salt range may also have gas rich shale rocks. As these resources are tapped, there will be greater competition among the producers, breaking Moscow’s hold on the gas market.

Greater focus on exploiting this potentially large source of energy is that China’s dependence on imports could decline significantly. This will affect Beijing’s unrelenting drive to invest in the countries that have large surpluses of energy and also those that can play a role in providing access to Beijing to these sources of supply.

Pakistan’s location right next to the Middle East and Central Asia – currently the largest potential sources of energy for China – is one reason why Beijing plans to make large investments in developing Pakistan’s transport infrastructure. A large team of Chinese railway engineers was recently in Pakistan exploring the possibility of providing assistance for linking the post of Gwadar with western parts of China. The Chinese consider the Pakistani port as an important part of the infrastructure they would like to develop to access the areas that have large surpluses of energy.

As Nick Butler of Kings College, London wrote recently, “there will no doubt be more energy crisis headlines in 2011. However, lasting changes are unlikely to flow from political conflicts in North Africa or the nuclear sector in Japan. It is the combination of geology and technology that could transform global energy in decades to come."

[B][U][CENTER][SIZE="5"][COLOR="DarkGreen"]How rich are the Pakistani rich?[/COLOR][/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: May 15, 2011[/B]

How rich are the Pakistani rich? Incredibly so, or just what is expected in a country that has income distribution more skewed than is normal for a country at its stage of development? The questions are important since the answers to them matter for the making of public economic policy. The answers will also affect the course of political development. Some of those who are watching the explosion in the Arab streets realise that relative deprivation — a concept developed by political economists many decades ago — is playing a role in turning millions of people against the regimes that have governed them for so long. Growing income disparity and widening consumption gaps are often the source of great political alienation. The political and economic systems that give rise to them come under pressure and may — and sometimes do — collapse under the weight of political discontent. This is what we are seeing in the Middle East.

Alienation increases when the riches of the rich are seen as ill-gotten, rather that obtained through hard work and entrepreneurship. Each of the successful revolutions (Tunisia and Egypt), as well as those still unfolding (Bahrain, Libya, Yemen), in the Middle East acquired a symbol of hatred. In Tunisia, it was Leila Traboulsi, the hairdresser who became President Ben Ali’s wife and then a symbol of the extreme extravagance of the ruling family. In Egypt, it was Ahmed Ezz who was favoured by the state as he went on to acquire lucrative assets and then became a steel magnate. He had a taste for tight Italian suits and expensive neckties; he now faces trial in a white prison uniform. In Syria, it is Rami Makhlouf, first cousin and childhood friend of President Bashar alAssad and he also happens to be the country’s most powerful businessman. He used his contacts with the ruling family to acquire licenses for businesses that handed out rich rewards, including Syriatel — the country’s largest mobile phone operator. In Libya, the sons of Muammar Qaddafi have accumulated untold wealth, stashed away in bank accounts at home and abroad.

Another lesson we learn from the Middle East is that the poor normally don’t risk their lives by confronting those who constitute the political and economic establishment. They are too preoccupied with earning small amounts of money, needed to sustain life for them, to take time off for agitation. But the not-so-poor are different. While the poor don’t come in contact with the very rich, the not-so-poor do. They work in the kitchens of the rich and prepare their meals; they serve the rich at their dining tables, drive their children to school, tend their gardens and provide other services needed by the affluent.

But the question of how rich are the Pakistani rich, is not easy to answer since the country does not produce detailed data on household incomes and income distribution. We will, therefore, have to do with some derived measures using the information provided by the World Bank in World Development Indicators. The Bank’s data bank provides estimates of the shares in national income for various quintiles of the population for its member nations. Adjusting the estimates to reflect the deterioration in income distribution that has occurred in the last few years, it is safe to assume that some 42 per cent of the total national income is claimed by the top 20 per cent of the population. This means that 36 million people have a combined income of $75.6 billion, which translates into a per capita income of $2,100 or twice the national average. According to the Bank, 27 per cent of the national income goes to 18 million people, the 10 per cent who sit on top of the income pyramid. For them, the per capita income is $2,700.

Applying the same distribution for the top 10 per cent and top one per cent of the population as for the entire population, it would appear that the total income of the affluent 1.8 million people is $13.12 billion, or $7,300 per capita, and for the richest 180,000, it is close to $20,000. The super rich 18,000 people have a combined income of $1.31 billion or $72,700 per capita. Since the poorest 10 per cent of the population receives only four per cent of the total income, their income per head is only $400 per annum. These numbers begin to put some substance on the extent of relative deprivation in Pakistan. The richest 40,000 people in the country have combined income equal to that of the poorest 18 million people. The super rich — the 18,000 who make up 0.001 per cent of the population — earn 180 times as much as the poorest 18 million. Or, to put it in another way, the super rich earn in just two days what it takes the poor to earn in one year.

A significant part of the wealth from which the rich derive their incomes is unearned: It is either inherited or is obtained through graft and corruption, or has been built up on the basis of tax avoidance. The rich have found many ways to dodge the tax man. Some of their income comes from agriculture which, by law, cannot be taxed. Over the years, the tax code has been punctured with holes which the rich use to not pay their share to the state. In more progressive economic systems, the tax system is the main vehicle the governments have of introducing some income and wealth equality into the society. In the case of Pakistan the opposite is the case: The burden falls on the not-so-rich.

It is clear that for the ruling establishment to avoid the kind of upheaval that has struck the streets of the Middle East, ways will have to be found to cater to those the economic system is not serving well. The best way is to devise a tax structure that introduces some equality into a system that is highly unequal.

[B]Source: [URL="http://tribune.com.pk/story/169144/how-rich-are-the-pakistani-rich/"]How Rich[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Living without foreign assistance[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 23 May, 2011[/B]

CAN Pakistan live without foreign assistance? This question has begun to be debated after a statement by Mian Shahbaz Sharif on May 12 when he said his province, the most populous and prosperous in the country, will make a serious attempt to forego foreign assistance with conditionalities.
The aim is admirable but the real question is whether it is achievable within a reasonable period of time. The only way to reflect on this issue is to take emotions out of it and build a case for or against aid by looking at the numbers.

We should begin this investigation by deciding on what should be the country’s rate of economic growth and that of its several provinces. Pakistan is doing poorly compared to its South Asian neighbours. Bangladesh --- once the much poorer part of this country which was doing much less well compared to its western wing--- has seen its economy grow at around six per cent a year in recent times. This is almost three times the current rate of economic growth in Pakistan.

Several serious Bangladeshi economists believe that they can see their country sustain a rate of growth of more than seven per cent per annum for many years.

The Indian annual growth rate has averaged 8.5 per cent over the last six years. Its ambition is to achieve double digit growth rates in two to three years and sustain them for decades. This seems feasible looking at the current trends. The rates of savings and investment are high enough to make a 10 per cent rate of increase in GDP feasible. If India achieves that rate it would have become one of Asia’s miracle economies.

Some of the empirical work done at the World Bank has shown that for a country such as Pakistan not to have an increase in the incidence of poverty, gross domestic product must grow at a rate twice the rate of increase in the work force.

Although Pakistan’s population growth rate is said to have declined to less than a two per cent a year — we will only have firm numbers once the on-going census has been carried out and its results tabulated — the rate of increase in the workforce continues to be three per cent per year. The reason why this is so much larger than the rate of increase in population is because of what demographers call “demographic inertia”. It takes times before fertility declines begin to translate into declines in the rate of increase in the workforce.

For Pakistan not to see any further increase in the already large incidence of poverty, the GDP must increase by at least six per cent annually. For a decline in the incidence of poverty, the rate of increase in the GDP must be more than six per cent a year — say seven or eight per cent. This is one reason why the Planning Commission, in setting its sights for the future, would like to see the economy expand by at least seven per cent a year. Is this feasible?

Pakistan does not have an efficient economy.There are many reasons for this. The technological base of the economy is poor; the work force is poorly trained and not well educated; supporting physical infrastructure (for instance availability of uninterrupted supply of electricity and gas) is below the level required by a growing economy; the state, mostly unwittingly, has placed many hurdles that entrepreneurs must cross; and rampant corruption increases the cost of business transactions.

My guess is that in Pakistan’s case the incremental capital ratio is of the order of four.This means that the country must invest at least four per cent of the gross do mestic product to produce one per cent increase in domestic output. For the economy to grow at between 7- 8 per cent a year, it must invest between 28 and 32 per cent of the GDP.This is more nearly twice the current rate. This could happen — other countries do it, India has surpassed this level in recent years — but it will need a great deal of effort.

According to Pakistan Economic Survey, 2009-10, the average rate of investment in the five year period between 2004 and 2008 was 18.9 per cent. It was higher in the earlier years but declined in recent times. About three quarters of the investment was financed by domestic sav ings, the remaining one-quarter was provided for by foreign savings which includes external assistance. Without foreign aid, even the low level of effort being made currently to generate growth would become difficult. To raise it to the levels needed would be virtually impossible without sizeable foreign capital flows, including foreign assistance.

If we look at external accounts, the most interesting and unexpected development in recent years is the sharp rise in the level of remittances. In March this year, the flow of capital from this source increased to $1 billion. If this volume is sustained, an amount of $12 billion would be received this financial year.

It is not clear why the remittances are increasing when there is so much uncertainty concerning Pakistan’s economic future. There must also be a negative impact on the earnings of the members of the diaspora as a result of the economic slowdown in countries where these people are located. Given this, one would expect a decline in the level of remittances rather than an increase.

However, this is not to suggest that the policymakers should not seek to become self-sufficient and aim to generate domestic resources needed for financing development. But this can only happen if both the people and the ruling establishment are prepared to reduce the level of current consumption in favour of larger amount of savings. The citizenry must also be prepared to pay a larger share of its income to the government as tax.

At this time the people don’t seem to be prepared to that and the government lacks the political will to collect a larger share of national income as tax.

What is clear is that to climb out of the current economic slump and to put the economy on a trajectory of growth on which the neighbouring countries are moving, the rate of investment need to be significantly raised. The additional resources needed for that to happen will have to come from the outside. Even with a concerted effort by the government and display of political will that the present set of rulers seem to lack, the transition to a higher growth path will have to be financed from abroad.

The talk of dispensing with external capital flow will remain just that — talk by politicians — unless they can come up with a credible plan for increasing domestic savings and tax-to-GDP ratio.

This brings me back to the statement by the Chief Minister of Punjab. If he and his government are serious about reducing — if not altogether eliminating their province’s dependence on external capital flows that come in the form of assistance — they should take advantage of the enormous opportunities that have opened up as result of the adoption of the 18th amendment to the constitution.

The amended constitution has not only transferred new functions to the provinces, it has also given them the authority to mobilise resources from within their borders. Up until now, the provinces have relied on federal transfers for more than 90 per cent of their expenditures. This proportion needs to decline. Only if that were to happen, will Punjab be able to wean itself away from external crutches?

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Standing at the crossroads again[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B]By Shahid Javed Burki
Published: May 23, 2011[/B]

‘Standing at the crossroads’ has become an overused metaphor for describing Pakistan’s economic progress over the last nearly 64 years. What is interesting about the country’s economy is that, with one possible exception, it has always managed to take the wrong turn whenever it arrived at a crossroads. We reached the first crossroads soon after the country gained independence and India, for whatever reasons, took a number of steps to cripple the Pakistani economy before it had the time to stand on its feet. It held back the release of what were called the sterling balances, owed by Britain to the dominions and colonies for the help they had provided in fighting the Second World War. It then threatened to divert irrigation water that flowed into the Pakistani part of Punjab from the canal headworks that were now located in India. It then punished Pakistan for not devaluing its currency with respect to the American dollar, as India and other members of the British Commonwealth had done. New Delhi imposed a trade embargo on Pakistan. However, Pakistan managed to find a way out of these crises by adopting a number of sound policies under the influence of some remarkable civil servants who were placed in charge of managing the economy. This was one occasion when Pakistan took the right road from the crossroads.

The second crossroads came in the late 1950s when the political establishment failed to find a solution to the problem of the ethnic divide created by the migration of eight million refugees from India to Pakistan. Under the leadership of the military that intervened for the first time in Pakistan’s history, the country abandoned democracy in favour of a highly centralised authoritarian structure. Under Field Marshal Ayub Khan, the country prospered economically but the lack of political consensus behind the model meant that it could not be sustained. The politics associated with this style of management got in the way.

The Ayubian model of economic and political management was abandoned when the country arrived at its third crossroad under a new military leader. Once again, Pakistan took the wrong road by not allowing the citizens of East Pakistan to take the reins of government that should have been in their hands given the enormous victory they had secured in the elections of 1970. The result was a civil war and the emergence of East Pakistan as the independent state of Bangladesh.

The country got stalled at another crossroads, the fourth in my list, when power was transferred to a civilian leadership from a highly discredited military establishment that had suffered a mighty defeat in East Pakistan. However, the country took the wrong economic road by bringing the state into economic management at a time when it had demonstrated its weakness in playing that role in many countries, especially across the border in India. Those who had studied the role of the state in economic management had concluded that it had an important role to play but not as the owner of economic assets. It should be a friend, guide and champion of private enterprise, not supplant it. Under Zulfikar Bhutto, the country had gone entirely in the wrong direction in terms of economic management.

The 9/11 terrorist attack on the US brought Pakistan to another crossroads. General Pervez Musharraf, now the country’s president, readily joined Washington in what was then called the ‘war on terror’ and received in return an enormous amount of military and economic aid. It has been estimated that the United States has given Pakistan more than $20 billion since 9/11, $14 billon as military aid and the remaining $6 billion as economic assistance. This aid was mostly wasted on the economic side as the country went on a consumption binge that temporarily raised the rate of GDP growth but left deep faults in the structure of the economy.

There is a great deal of wrong these days with the economic state of Pakistan. According to Parvez Hasan, a Pakistani economist who served in number of senior positions in Pakistan and at the World Bank, and has written about his experiences in a recently published memoir, “Given the multi-faceted economic and political problems, the revival of economic growth to a level that would ensure an adequate rate of job creation and some progress towards reducing the present high incidence of poverty appears an uphill task and perhaps more difficult than at time in the past. It is easy to be pessimistic about Pakistan’s future, (but) I believe that it is quite possible that in a decade Pakistan might surprise both itself and the world at large by not only surviving with its borders intact, but also turning a corner in a very significant way towards a modern, moderate, rapidly growing state.”

This means that Pakistan stands once again at another crossroads. There are many directions in which it can go but only one is the right one. That will keep the political system in the hands of the elected representatives of the people, make the military and security establishments responsible to the legislative branch of the government, make public officials responsible to special purpose institutions that will have the power to investigate and punish all those who abuse people’s trust, introduce a fiscal system that will yield enough resources to pay for most of the growth in the national product the country needs while bringing about better distribution of income and wealth and introduce tolerance and respect for all the people no matter what their faith or disposition is. Pakistan’s current policymakers must also engage the country with the world, help it to move away from isolation, into which many circumstances have thrust Pakistan, and focus on turning international trade into a major driver of economic growth. Development economics is not a discipline that trends itself to pessimism. I believe that the right path can be taken even from the most crowded and difficult-to-negotiate crossroads.

[B][I]Published in The Express Tribune, May 23rd, 2011.[/I][/B]
[url=http://tribune.com.pk/story/173802/standing-at-the-crossroads-again/]Standing at the crossroads again – The Express Tribune[/url]

The politics of aid
 

[B][U][CENTER][SIZE="5"]The Politics of Aid[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: May 29, 2011[/B]

In a speech given recently at the Woodrow Wilson Centre in Washington, I made two points about the flow of aid to Pakistan. I said that the American assistance to the country was overestimated since some of the numbers that were discussed in the press — in particular the American press — did not differentiate between commitments and disbursements. The programme envisaged under the Kerry-Lugar bill was moving very slowly. There were several other aspects of aid-counting that had to be factored in before aggregate numbers were used.

My second point was to suggest that China had become the largest provider of aid to Pakistan and would become even larger, once the various programmes and projects that were in the planning stage were implemented. The second point drew some attention from some people in the audience. In one email, I was told that the numbers available in various documents suggest that China was nowhere near the position I had assigned the country in my comments. This reaction reflected less than full understanding of what is really meant by ‘aid’. I think this subject is important enough to be given some careful thought, especially by those in Islamabad’s official establishment who have the data to estimate the amount of total aid the country receives from various bilateral and multilateral sources.

Aid is commonly associated with what is generally called budgetary and balance of payments support. This assistance may come with policy conditions. Once they are met, the provider of aid writes a cheque, the proceeds from which can be used in any way the recipient wishes. This is the way the International Monetary Fund (IMF) aids the countries in economic distress. In Pakistan’s long history with the Fund, the country has seldom succeeded in completing what the IMF calls the “programme”. This is likely to happen once again, as the Fund is not satisfied with Pakistan’s performance and has suspended disbursements from the $11 billion plus programme it signed with Islamabad in late 2008.

The World Bank began to provide non-project assistance in the early 1980s when its introduced ‘structural adjustment lending’. The idea was to provide free money to the recipients when the needed structural adjustments were promised. Mahbubul Haq and I — both of us then worked in the Bank’s policy department — opposed this move by suggesting that this kind of money would be wasted and also develop poor habits. I believe our assessment was right. Pakistan is a good example of a county where this has been the outcome.

Aid has always been difficult to define. Several decades ago, Mahbubul Haq had the Planning Commission carry out a study in which he drew a sharp distinction between gross and net flows of aid. In determining net flows, he factored out from the total the amount that went back to the donors in various forms. Often — at least at that time — aid came to be tied to the procurement of goods and commodities being financed. Their prices could be much higher than those in the international market place. Some of the project aid came with the condition that the consulting services being provided would come from the donor, even when those skills were available from within the country receiving aid.

Haq’s work in the Planning Commission had an important impact in the sense that the members of the OECD (Organisation for Economic Co-operation and Development), the organisation of rich countries, pledged that they would not tie their aid to procurement from the countries providing it. Development agencies such as the World Bank and the Asian Development Bank insisted on the provision that the procurement from their funds would be on the basis of international competitive bidding — contracts go to the cheapest bidder.

This last provision brings me to case of China’s assistance to Pakistan. There is an impression that the Chinese assistance is more talk than substance; that the country promises more than it gives. This feeling is based on a misunderstanding of what is really meant by assistance. The Chinese are interested in giving mostly project support. It was, after all, Mao Zedong who said that it is much better teaching the needy to fish, rather than giving them fish to eat. Beijing considers budgetary support equivalent to giving fish and project assistance teaching the recipient to fish. One of the few occasions the Chinese departed from this practice was when I went to Beijing to seek their support to help us service debt we had with such ‘preferred creditors’ as the IMF and the World Bank. This was in late 1996, when I had taken leave of absence from the World Bank to manage Pakistan’s finance and development. We were then very close to bankruptcy. Telling me that they would not let Pakistan default while I was in charge, they made a deposit of $500 million in our account with the Federal Reserve System in New York. That saved the situation for us.

Today, China is by far the largest provider of project assistance to Pakistan. The financing of these projects comes mostly from Chinese sources which combine loans at commercial rates with grants. This helps to lower the cost to Pakistan in terms of both the amount of interest paid on the loan, as well as the period over which it needs to be serviced. China, as is well known, has financed the construction of several high profile projects — roads, nuclear stations, dams and railway equipment. For proper aid accounting, the terms of financing for each of these projects will need to be compared with alternative sources of supply and the difference between the two would constitute the component of aid.

If this calculation is done, it will show that an impressive amount of assistance is coming to Pakistan from China. Having some firm estimates — something the economic affairs division should be able to do — will put in perspective the amount of help Pakistan is receiving from China compared to other donors. Since our foreign policy focuses on economic relations, such an estimate will put the sources and amounts of aid the country receives in the right context.

[B]Source: [URL="http://tribune.com.pk/story/178259/the-politics-of-aid/"]The Politics of Aid[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Foreign assistance: What should the donors do?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]Donors need to recognise that there are many concerns about the way they provide assistance, how they spend the money and how they hold themselves accountable for the help they give.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Monday, 30 May, 2011[/B]

PAKISTAN’S case for receiving large amounts of foreign flows is well known. Given the low level of domestic savings and also the large gap between export earnings and payments for imports, the country needs a sizeable infusion of foreign capital.
Without it the economy will not be able to meet the two gaps: the gap between savings and investment and the gap between import bill and export earnings.

While the need is there, it still leaves open the question as to why should the donor assist especially when some of them have budgetary problems of their own. This is certainly the case with the United States which, at this time, is struggling to balance its own books and to cut down the size of its outstanding debt.

That is less so with China, Pakistan’s other large donor, which has money to spare for financing large aid programmes. Notwithstanding the donors’ own budgetary situation it is incumbent upon the recipient to give comfort to those providing support that their dollars are being put to good use.

The case for aid has usually been made on two grounds — moral and strategic. Those who favour it sometimes argue that it is essential for those who are rich to aid those who are poor. This applies to both the poor within a society as well those who have been left behind in the international economic system. In the latter case, it is sometimes argued that the process of globalisation has made it worse for some of the poor states.

Pakistan’s claim for being assisted rests mostly on the need to stabilise the country and the society within it so that it does not disturb world peace. For several donors therefore the reason for assisting Pakistan is strategic. No matter what is the reason for aiding a country, two questions remain. The first is in what form should aid be provided? The second: in what way should the aid dollar be managed?

For obvious reasons, the recipients would prefer to receive straight forward cash assistance with mini mal conditions. They would like to see aid come in the form of simple budgetary support or to meet the trade gap – in other words to fill the two gaps. The latter type of assistance is given by the International Monetary Fund, the purpose for which the institution was created in the first place. However, in return for providing funds to tide over countries during periods of crises, the IMF wants them to adopt structural changes in the economy so that crises don’t keep on recurring.

Most of the non-IMF money used to come in the form of project and programme assistance. The first was relatively straight forward: assistance provided for implementing critical projects for which the intended recipient neither had the resources nor the expertise. Later, especially after the first oil-shock of the midseventies, multilateral agencies such as the World Bank and the Asian Development Bank began to provide assistance for structural reform. This was given in return for the recipients implementing deep structural reforms in the economy.

More often than not this was money given in return for good behaviour: reward for undertaking the right sets of reforms. Sometimes aid was needed to meet the shortfalls that may occur if needed structural changes were made. For instance, by opening a relatively closed econ omy, a country may see a sharp jump in imports while the export response was still not in place. This may result in increasing temporarily the balance of payments deficit which may have to be closed with the help of foreign assistance.

In the case for a country such as Pakistan there are many arguments for favouring aid to come in the form of project and programme support rather help for closing the budgetary and balance of payments gaps. The latter type of assistance creates what people in finance call a “moral hazard” situation – the tendency to take risks in the expectation that somebody will be there outside to come to the rescue when things really turn sour.

Pakistan has been through these kinds of phases many times. In 1996-97 it was rescued from bankruptcy by the Chinese who deposited $500 million dollars in the country’s account with the US Federal Reserve System. In 2001-02 after the 9/11 terrorist attack, the US came to Pakistan’s assistance by persuading other countries to join it in forgiving large proportions of debt Islamabad owed to them. In 2008, the IMF came in with a $7 billion Standby Arrangement to help stabilise the sinking rupee and fast disappearing foreign exchange reserves.

None of these large rescue pack ages induced the policymakers to change the structure of the economy. The country has failed to increase the tax-to-GDP ratio; it continues to spend wastefully, the rate of increase in consumption is higher than the rate of increase in GDP; it spends a relatively small proportion of the GDP on human development than, for instance, on defence; it continues to assist loss making enterprises in the public sector; it has made practically no effort to reduce the size of the government while increasing the efficiency of the administration; it has become exceptionally tolerant of corruption at all levels and in all branches of government. The list goes on and on. Can the donor community help change this habit of appealing for help during periods of extreme crises? The answer has to be yes.

The donors must also insist on the proper budgeting and accounting of the financial resources they provide. Pakistan has an elaborate system in place for budgeting, accounting and accountability. That notwithstanding it needs to be improved with all intergovernmental transfers kept under review. The aim should not be to create a silo within which aid money will flow but the development and reform of the entire system.

It is also necessary for the donors to recognise that there are many concerns about the way they provide assistance, how they spend the money and how they hold themselves accountable for the help they give.

These concerns will increase as more development functions are transferred to the provinces under the 18th Constitutional Amendment.The donors will need to work directly with the provincial governments. This means that all the provinces will need to create the capacity to work with the donors and coordinate their activities.

If all activities by the donors in individual provinces are first cleared with the federal authorities, it will defeat the purpose of devolution. If the donors find that some of the provinces don’t have the capacity to handle foreign assistance, should they turn to NGOs for implementing their programmes and projects? If this was done, it will hinder the development of weak governments. Devolution has added another set of questions to the proper utilisation of foreign aid.

[url=http://epaper.dawn.com/ArticleText.aspx?article=30_05_2011_606_005]Foreign assistance: What should the donors do?[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Where will the budget take us[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 06 June, 2011[/B]

AT this difficult time in its history, Pakistan has one of the most competent teams of economic managers in place in years. They are stars from the field of finance, development, planning and investment banking.

Given the right amount of political space, they have the ability to turn around the faltering economy.

The budget they have presented for consideration to the National Assembly would do little to move the economy from the slump in which it has been wallowing now for past few years and get it moving again. They could have done a number of things by applying their collective experience. This did not happen apparently because the political bosses did not give them the freedom for manoeuvre.

The first, of course, is the country’s dismal resource situation. As has been said repeatedly, the country continues to slip in terms of collecting a reasonable amount of national income as taxes.

Today Pakistan has one of the lowest tax-to-GDP ratios in the world. It will be a bit more than nine per cent when the 2010-11 financial year finally closes. The budgetary proposals presented to the parliament by Finance Minister Hafiz Sheikh will push it up to about 10 per cent. However, given the past record, even this modest increase may not be achieved.

There are several unpleasant consequences of this. The most depressing of these is that the government does not have much left in its hands to pay for social services the poor need and deserve.

Pakistan has a dismal record of human development. Its population of some 180 million remains poorly educated and in poor health. These conditions will not improve unless the public sector spends more on education and health.

The other side of the resource coin is government’s non-development expenditure. It is widely known that there is an enormous amount of waste in the way it spends its meagre resources.

The finance minister should have addressed this issue more fully and with resolution. He also needed to lay out a credible plan for addressing waste and inefficiency in the way large public sector corporations are being managed.

Managers of most of these poorly performing entities have been appointed on the basis of their links with those in power rather than on the basis of competence. It is not surprising that they are a huge drain on the public exchequer.

The finance minister did well when he had the portfolio of privatisation in one of the administrations of the Pervez Musharraf period. He could have used that experience to lay down a strategy and a plan for handing over some of these enterprises to the private sector.

This brings us to the issue of the fiscal deficit which has been the Achilles heel of the management of the Pakistani economy. The budget, with an eye on the on-going discussions with the IMF, promises to reduce this to four per cent of GDP. Whether this will help to win the support of the Fund will depend on how that institution sees the tax effort in light of the country’s history.

The managers of the economy have once again decided not to touch agriculture as a source of revenue. This means they were not able to overcome the resistance of the big farmers who have managed to get their sector exempt from income tax. The constitution does not allow federal income tax to be levied from agriculture, but Islamabad can exert pressure on the provinces to take care of this sector which accounts for over one-fifth of the national income. During my brief tenure as the de facto finance minister in 1996-97, the access of the provinces to the resources in the Divisible Pool was made conditional upon raising income tax from agriculture.

We prescribed two per cent of agricultural income as the minimum for drawing from the divisible pool. Unfortunately this was not looked at as a condition in the Seventh National Commission award announced at the end of 2009 but it could have been done retroactively in the budget. But that required political will.

The budget speech also promises to reduce the rate of inflation by half, to nine per cent in 2011-12. The assumption here is that a smaller fiscal deficit will reduce the printing of money for financing which in turn, by decreasing the supply of money, will bring down inflation.

This is not a credible position to take since the fiscal deficit not be reduced to the promised level nor the resort to the printing press will be curtailed. It is very unlikely that inflation will come down that rapidly. It is important to be honest with the citizenry.

Where will this budget take the economy over the next financial year? The answer unfortunately is not very far. It will not revive economic growth, not reduce the dependence on foreign flows, not reduce the incidence of poverty nor lessen the gap between the rich and the poor, and not help to integrate the economy with rest of the world. Something better was expected from a team of this talent and experience.

[B][U][CENTER][SIZE="5"]The widening gap between the Muslim world and America[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: June 6, 2011[/B]

US President Barack Obama seems to be the only person of any significance in Washington who seems to understand that the game has changed for his country in the Muslim world — not just in Arab countries but also in those of Islamic faith but of different ethnic origin. Among the non-Arab parts of the Muslim world, the countries where Americans are fast losing influence are Turkey, Afghanistan and Pakistan. It was lost decades ago in Iran. These four countries have a total population of 350 million, considerably more than the total for the Arab world. Why has this happened? There are several reasons for this, of these three are particularly important.

The first is the approach adopted by President Obama soon after assuming the American presidency. In a much anticipated speech delivered at Al Azhar University in Cairo on June 4, 2009 the American president said that his country’s approach to the Muslim world will be different while he was in charge of the making of foreign policy in Washington. “We meet at a time of great tension between the United States and the Muslim world — tension rooted in historical forces that go beyond any current policy debate,” he told his Cairo audience. “The relationship between Islam and the West includes centuries of coexistence and cooperation, but also conflict and religious wars. More recently, tension has been fed by colonialism that denied rights and opportunities to many Muslims, and a cold war in which Muslim-majority countries were too often treated as proxies without regard to their aspirations. Moreover, the sweeping change brought about by modernity and globalisation led many Muslims to view the West as hostile to the traditions of Islam.”

President Obama promised to change these attitudes. “I’ve come here to Cairo to seek a new beginning between the United States and Muslims around the world, one based upon the truth that America and Islam are not exclusive and need not be in competition. Instead, they overlap, and share common principles — principles of justice and progress; tolerance and dignity of all human beings.”

The second reason for the widening of the gap between the West and the Muslim world is the Arab Spring — the string of explosions that have rocked the Arab street in several countries. This has resulted in the demise of two long-serving regimes, and threatens several others. While the West – including the United States – was slow to appreciate the significance of this development, one consequence of this change has become clear. When the history of this extraordinary movement gets to be written, it will be recognised that the address by Obama in Cairo played a big role in emboldening the Arab street.

The policy towards the West in these countries will not be made by authoritarian regimes that could ignore the sentiment of the street. Strong rulers, often supported by their militaries, were able to ignore the aspirations of their people and opt for favoring the strategic positions that suited the West, in particular the United States. Egypt and Pakistan were at the forefront of these moves. Egyptian President Anwar Sadat signed a peace treaty with the state of Israel without asking for the settlement of the Palestine dispute. Pakistan, under three different military regimes, aligned itself closely with Washington, even when some of what it promised to do in return for support by America was not in its strategic interests. With the Muslim street having shown that it can mobilise quickly when the regimes in power adopt unpopular policies, it is highly unlikely that the rulers of this part of the world will have the same room for manoeuvre compared to when they operated in simpler times. The policy space in which they work has been considerably narrowed.

There is also an increase in confidence among the leaders of several countries in the Muslim world. Leading the way is Turkey, a country that had for decades attempted to become a part of the western world but is now governed by a party and an individual who are determined to follow an independent line. According to Anthony Shadid, a Pulitzer Prize-winning journalist writing for The New York Times, “there is a longstanding debate over whether Turkey has tilted east after decades of embracing the West as a Nato member and almost reflexively allied with the United States. It still nominally embraces the goal of joining the European Union, carrying out reforms mandated by the entry process that have made Turkey a far more moderate place. But sensing a decline of American power in the region, Turkish officials have become sharply more assertive in the Middle East, priding themselves on keeping open channels to virtually every party”.

Even Afghanistan, beholden to the United States for keeping an unpopular regime in power and pouring billions of dollars into the country for what is called nation-building, has become assertive. Hamid Karzai, the country’s president, has warned Nato that he will not tolerate any more air attacks on civilian targets, even if they are suspected of harbouring the enemy. Pakistan is passing through a similar reassessment of its relations with Washington, especially after the May 2 attack on Abbottabad that killed Osama bin Laden. There are many in Pakistan — perhaps a large majority — who believe that the rise of Islamic extremism has to be checked and that the people operating outside the purview of the law have to be brought under control. Terrorism cannot be tolerated as a way of forcing onto the rest the worldview of a small segment of the population who wish to follow a different way of life and have a different approach to the world outside. That said, there is a seeming consensus emerging in the country that the war against terrorism will have to be fought on Pakistan’s terms and not on terms dictated from the outside.

The narrowing of the space within which policymakers can operate in the Muslim world will have enormous consequences for the countries in the region. One result will be the widening of the gap between them and the West, unless the latter makes some fundamental adjustments of its own.

[B]Source: [URL="http://tribune.com.pk/story/182893/the-widening-gap-between-the-muslim-world-and-america/"]Widening Gap[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Chinese investments in water projects[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: June 13, 2011[/B]

There is news in the western press that the Chinese may be getting ready to make large investments in developing Pakistan’s water resources. These investments will be made to increase the amount of water available for irrigation and using water to generate electricity. According to an item in a recent issue of the Financial Times, the contemplated amount of investment is of the order of $15 billion. This amount has been proposed by the Three Gorges Project Corporation, the entity that built and operates the largest water control project in the world.

The Chinese company would like to write a new master plan for using the available flows in the Indus River. A total of $50 million would be spent on the plan and would draw upon the studies carried out several decades ago by the World Bank and the United Nations Development Programme. The earlier plans had also identified a number of potential sites for the development of the enormous hydroelectricity potential of the rivers of the Indus basin.

But the plans remained just that, plans. No action was taken either for political reasons or for the reason that the various administrations that held the reins of power at various times did not pay attention to the development of the sources of energy supply. Now as energy shortages are taking heavy economic and social tolls, Islamabad has begun to look around for help. China is one direction in which it is heading.

In 2010, China and Pakistan agreed on an investment deal to build the Bunji dam on the Indus. In additions to this investment, the new plan that China is offering to develop will include large projects at sites such as Kohala and Dashu. If these investments materialise, China will bring to Pakistan its expertise in building large water projects. It is ironic that some of the knowledge China will bring to Pakistan was learnt initially from Pakistan itself. In the 1970s, Pakistan was recognised as the leader in the developing world on the management of large river projects. China then looked to Pakistan to learn what it needed to know when it turned its attention to harness its many rivers.

The dam on the Yangtze at Three Gorges has provided China unparalleled experience in managing large projects. The country has replaced Canada, Italy, Germany and the United States in terms of hands-on experience with water investments. When Pakistan built the lndus Water Replacement Works in the 1960s, it engaged several western companies to design, build and supervise the construction of the projects on the three western rivers in the Indus system. The Indus, the Jhelum and the Chenab had come to Pakistan’s share after the signing of the Indus Water Treaty with India in 1960. China was then absent from the scene. Now no other country has the kind of experience with large water projects that China has accumulated in three decades.

It is interesting to note how China developed this expertise. My own involvement with the Three Gorges project exposed me to the way China does large water investments. In 1987, I was appointed to head the department responsible for the Bank’s operations in China. One of my early responsibilities in the new job was to chair the three-man Three Gorges Committee. The other two members were from China and Canada. The staff work for the committee was done by the Yangtze Valley Authority and the World Bank. At our very first meeting, the Chinese made it clear that their interest in turning to the Bank was not to obtain financial support from the institution. They were much more interested in getting the Bank to use its knowledge of large water projects to help them with the design of the Three Gorges development program. By that time the Bank had acquired worldwide reputation in the area of water management. Much of this rested on the Bank’s work in Pakistan and some of the engineers who worked on the various Bank-funded and supervised projects were from Pakistan.

The Bank’s technical staff – many of them from Pakistan – told me to press the Chinese on three issues: To satisfy the global community that the project would not be an environmental disaster, that the large number of people it would displace would be properly settled and that water shortages would not result downstream of the project. At the first meeting of the committee under my chairmanship, I made it clear that the feasibility report would not be approved unless the committee was satisfied on these three counts. The effect of this was to postpone the decision on the project by several months. I had expected that the Chinese would be unhappy at this decision since they were keen to proceed with implementation. That did not turn out to be the case. In fact, they were pleased that I was able to bring to the table some of the knowledge the Bank had accumulated in the area. It was the Canadians who were unhappy with the delay. They were anxious to have the project go forward. They hoped to pick up a number of contracts once Beijing started to build the massive dam.

We hired a number of consultants to look at the three aspects of the project with the result that a great deal of additional work got done on environmental and settlement issues. A year later, the committee approved the project and once that was done the Chinese told me that they would not ask the Bank for financial support nor would they engage foreign consulting companies for implementing the project. Given this experience, what would be my recommendation to Islamabad for managing the Chinese involvement in water management in Pakistan? I recommend bringing in the World Bank and the Asian Development Bank as advisers, once the Chinese have done the spade work.

Islamabad may also consider establishing a new authority committed entirely to the implementation of the Chinese plan. And, special emphasis should be given to addressing the types of issues we examined when the feasibility report of the Three Gorges Project was being looked at.

[url=http://tribune.com.pk/story/187562/chinese-investments-in-water-projects/]Chinese investments in water projects – The Express Tribune[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Fallout of volatile oil prices[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 13 June, 2011[/B]

PAKISTAN’S economy is often affected by developments that take place outside the country’s borders and over which the policymakers in Islamabad have no control. Policies such as those adopted in framing national and provincial budgets and in determining the structure of tariffs matter.
But what also matter is what happens in some of the international markets. One of these is the oil market, given Pakistan’s large and increasing dependence on imported oil.

This is why it is important to take note of the decision taken on Wednesday June 8 by the representatives of the eleven states that make up the OPEC, the cartel of oil producers. The meeting ended in considerable acrimony and dashed expectations that the members of oil cartel will increase production to steady the markets. The development led to an increase in the price of Brent crude by $2 to $118.59 a barrel.

Saudi Arabia, with the OPEC-allocated level of production of 8.9 million barrels a day, is the largest member of the OPEC followed by Iran with 3.7 mbd, UAE 2.5 mbd, Kuwait 2.4 mbd, Venezuela 2.2 mbd and Nigeria 2.1 mbd. The remaining four – Angola, Algeria, Ecuador and Libya together account for 4.4 mbd. Ecuador is the smallest producer in the group with production of only 400,000 mbd. Iraq, the twelfth member, has not been subjected to a production quota since the country was invaded by the United States. The OPEC production of 26.2 mbd is 40 per cent of the world total. In December 2008, the members had agreed to produce 24.85 mbd but the actual production is about 10 per cent higher. Some of the large oil producing and exporting countries such as Russia have not joined the cartel.

The production quotas fixed by the cartel are not always followed by its members. Saudi Arabia, for instance, unilaterally increased its production to compensate for the decline in exports from Libya. It increased it again in May by about 200,000 and is set to add further production of 200,000 and 300,000. In spite of the OPEC determined quotas and the powerful oil ministries that manage production in their countries, no firm estimates are available as to how much the cartel really produces. This lends to a great deal of speculation and volatility in the oil market. There is a consensus among experts that the cartel is currently pumping about 1.3 mbd more than the agreed limit.

The oil ministers met in Vienna on June 8 to decide on the levels of production and it’s sharing among the members. Vienna is the city where the OPEC has its headquarters.The meeting was held as political turmoil in the Middle East was raging. Libya because of the civil war was not producing much oil and exporting even less.The country’s 1.3 mbd of exports seemed lost for as long as the struggle in the country remained unresolved. Its place at the meeting was contested by the government and the rebels. The ranks of the rebels were strengthened by the defection of the former oil minister. Small of the smaller Arab producers were also having political difficulties. Syria’s 150,000 barrels a day of oil exports were in jeopardy because of the mounting violence in the country.Yemen’s 260,000 barrels a day of production had virtually halted. The country’s president had gone to Saudi Arabia on the eve of the Vienna meeting. His future as well as that of his country remained uncertain. A complete breakdown in law and order could conceivably threaten the nearby Bab el Mandeb shipping lane through which an estimated 3.7 mbd passed. According to one oil expert, “Yemen was wild card. It could be the failed state in the middle of the gulf and it threatens the stability of the largest oil producer, Saudi Arabia.” In light of all these uncertainties, there was hope expressed on the eve of the meeting that the oil ministers, meeting in Vienna, will act to stabilize a jittery market. The decision to increase production would have been the first taken in nearly four years. The aim would have been to put a lid on the continuing increase in the price of oil following political problems in many countries of the Middle East. Saudi Arabia wanted the price of crude to settle down well below the current levels. Ali elNaimi, the Kingdom’s oil minister had indicated on several occasions that he wanted oil prices to remain between $70 to $80 a barrel, much below the trading range between $105 and $125 which has been in place for more than four months.

The Saudis were also concerned that the world demand would increase as the refineries, following the pe riod during which they shut down for maintenance, return to full production and that would add to the pressure on prices. Riyadh was nervous that at the current levels, the global economy may not be able to sustain the tepid recovery from the Great Recession of 2008-09. ElNaimi described the Vienna meeting “the worst we have ever had”. His attempt to raise production was blocked by Iran. Terhran was joined by several small producers who did not have the capacity to increase in output. A decline in the price of oil would have reduced their earnings. The Saudi minister wanted to add 2.5 mbd to the club’s production level. OPEC’s spare capacity of some $4 mbd is in the hands of just three countries – Saudi Arabia, Kuwait and the United Arab Emirates. All three were in favor of raising the level of output.

There was also some concern in several quarters about what is called “demand destruction” – when consumers begin to reduce consumption on a permanent basis by making changes in their life style while investments are made in developing non-oil sources of energy. Experts believe that this is likely to happen if the price of oil remains above $125 a barrel for a long period of time. After the difficult meeting in Vienna it has begun to approach that level.

What should be the reaction in Islamabad to the Vienna decision? Pakistan, like several other developing countries, tightly controls the oil market. Sale price at the service stations are set by the government and are well above the price at which the companies buy the product. The difference is collected by the government as a form of oil tax. There is uniform price in the country which means that the areas near the ports through which much of the oil comes subsidize those that are upcountry. This kind of regime produces enormous distortions which are not helpful for an economy that is so troubled most of the time.

Among the several structural changes the government needs to introduce is in the area of oil marketing. Ideally the government should let the price at the pump and at the points of distribution to be set by the market. It should reflect competition among the distributors. The state can charge a tax on sales so as not to affect the revenues generated by oil. The market should be allowed to develop instruments that will take out the wide fluctuations that have become the norm in oil trade.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The urban-rural divide[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: June 19, 2011[/B]

Pakistan’s economic and political future — perhaps even its continued existence as a unified state — will be defined by the way the urban-rural divide finally gets resolved. This divide has been at the centre of social conflict ever since the country emerged as an independent state when there was a sudden infusion of urbanism into a culture that was predominantly rural. This led to conflict between the ‘insiders’ and the ‘outsiders’. The insiders were led by the landed community who, after having worked out a comfortable relationship with the British rulers, saw no reason why it should support the idea of Pakistan. They were confident that they could work out a similar arrangement with the Hindus, once the British transferred power to them.

The outsiders were less sanguine about their future in a Hindu-majority political system. They feared that domination by the Hindu community in an independent India would further reduce the economic and political chances available to the Muslim minority. This community had already suffered a great deal once Muslim power had given way to British rule. The British, in fact, had adopted a number of policies to reduce the influence of the Muslim community in the affairs of the country over which they now ruled. Persian was replaced with English as the official language; in recruiting the personnel for the expanding British administration, the new rulers preferred non-Muslims over Muslims; and from 1828 onwards, British authorities began to confiscate land endowments which financed Muslim education. As MJ Akbar reminds us in Tinderbox, “the principal Muslim grievances were in education policy that denied them opportunity, reducing them to ‘contempt and beggary’”.

Once the British established control over what is now Punjab and Khyber-Pakhtunkhwa, they used the state to protect the Muslim community from the economic power of the Hindus and Sikhs. This change in approach towards the Muslims was to reward them for the help they had given the new rulers to suppress the Indian Mutiny of 1857.

Since most of the leadership of the insiders was lukewarm to the idea of creating a separate homeland for the Muslim community, it took some time before this group was able to reassert itself. In the meantime, Pakistan was governed by a ruling elite that drew its power from the outsiders — the muhajir community. In other words, the first generation of Pakistani rulers had a strong urban bias in their thinking about economic and political issues. One consequence of this orientation was the neglect of agriculture which was the most important part of the economy.

As a result of this history, these two Muslim communities — those from Muslim-minority and Muslim-majority areas — developed very different approaches towards the state. The former saw the state’s role limited to a few functions; the latter placed a heavy reliance on the state. Once the insiders were in power, they pulled the state in to help them consolidate their economic hold over the country.

The urban bias could not be maintained over time. It was corrected when the military came to power under General Ayub Khan. Both the military president and the troops he commanded had deep roots in rural Pakistan. Ayub Khan brought in a landlord — the Nawab of Kalabagh — to help him govern the then West Pakistan . The nawab introduced a style of governance that has persisted to this day. In spite of the enormous amount of demographic and economic change that has occurred over the last several decades, the landed interests continue to exercise a disproportionate amount of influence over political and economic decision-making . The nawab’s influence on statecraft has not been fully appreciated. He froze the process of change and the political ascendency of the refugee community that had begun to occur with the founding of Pakistan. This is where the situation stands today. The ruling elite refuse to allow modernisation from entering the political, economic and social domains, even when they profess to favouring democracy. The ruling elite exercise total control over policymaking. They don’t allow people to influence the making of policy through their representatives in the national and provincial assemblies. In this context, I am intrigued by the focus the Planning Commission has placed in its growth strategy on the city as the driver of economic and social change. Whether the current political masters allow this strategy to be pursued and how it could correct the current, rural-based system are some questions for a later article.

[B][I]Published in The Express Tribune, June 20th, 2011[/I][/B]
[url=http://tribune.com.pk/story/192177/the-urban-rural-divide/]The urban-rural divide – The Express Tribune[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Energy links may reshape South[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 20 June, 2011[/B]

SOME of the confidence displayed by the senior Indian leaders about the country’s economic future has begun to dissipate.
In his budget speech in 2010, Pranab Mukherjee, the current finance minister, had predicted that the country was headed towards double digit rates of GDP growth.

The revised growth numbers for the first quarter of the current financial year suggest a much lower rate of growth – of about 7.6 per cent on an annualised basis.

There are several reasons for this decline in expectation of the country’s future economic performance, some of them shared by other countries of the South Asian region. Inflation — in particular food inflation — has begun to take a heavy economic toll.

Large scale corruption has undermined the confidence of the citizenry in the quality of governance offered by the governments that hold the reins of power in South Asia. And, there are serious shortages of energy that inhibit investments in the economies. There is some indication that the South Asians may be on the way to find ing regional solutions to the problem of energy deficiency.

At the time of independence, the electric systems of the countries of mainland South Asia were connected with one another, albeit in a low technology way. For instance, a significant share of power used by Lahore came from a power station that was located in the part of the Punjab that went to the share of India.This link was severed soon after the two countries gained independence. Since then the power systems have not been linked. There have been some discussions but without much progress of connecting the much more elaborate grid systems in Bangladesh, India and Pakistan.

At one point when Pakistan had a surplus of energy, a number of power stations were commissioned by the private sector, there was some talk of exporting the surplus power to India. This could have been done only if the grid systems of the countries were connected. The proposal did not go very far as within a few years Pakistan had gone from being a surplus to a power-deficit situation.

The recognition that without regional integration, South Asia will not be able to realise its economic potential has been slow in coming.

If there is a lesson to be learned from experiences around the globe, it is the largest economy in the area that has to play a leading role in bringing about greater economic integration.

This was the case in Europe when the initiative to move towards greater economic cooperation was taken by the area’s largest economies, France and Germany. In the North America Free Trade Area, the United States took the lead. In the Association of South East Asian Nations, ASEAN, Indonesia, by far the largest country in the region, decided not to throw its weight in moving forward the arrangement.

India, South Asia’s anchor economy and also by far the most rapidly growing economy in the region, has been reluctant to take the lead. In fact, it was Bangladesh that was behind the initiative to create the South Asian Association for Regional Cooperation (Saarc) The Indian insistence that the goals set out in the Saarccharter should be relatively modest has kept this initiative from developing a momentum.

Politics, rather than economics, was the reason why the South Asian region remains poorly integrated. That may be changing with the sector of energy taking the lead. According to a study carried out by USAID with the help of the Confederation of Indian Industry only nine per cent of the hydropower potential of South Asia has been tapped. Coal and water are the two most important sources of power in South Asia followed by natural gas. But India and Nepal are making some progress in developing plans that would result in providing benefits to both countries from the tremendous hydroelectricity potential of the fast flowing rivers and streams that originate in the Himalayas.

India will need to add 250,000 megawatts of power to its current capacity by 2017, a five-fold increase to sustain its economic growth. According to the AI study, “a South Asia grid will give the region 100,000 megawatts of power to trade and help India tap the hydropower and natural gas reserves of its neighbours.” There are several projects at the planning stage. The most advanced is a 87 miles inter-country grid to be built to initially supply Indian power to its neighbour, Nepal. In return Nepal will construct power plants that will tap into its enormous hydro potential and supply the surplus power to India over the same grid. By 2019, Nepal will harness about 3,000 megawatts of power and will export most of it to India. Another project — but at an early stage of development — is a $450 million undersea power transmission link between India and Sri Lanka.

Among the projects that have gone beyond the planning stage is the New Silk Route that will bring natural gas to Pakistan and India from Turkmenistan. This promises to supply 3.17 billion cubic feet of natural gas daily to the energy starved nations of South Asia. The project being developed with the help of the ADB will cost $7.6 billion and could be completed by 2016. Fuel prices, transit fees, and gas sales and purchases are being negotiated.

According to one assessment, “discussions have faltered many times in the past decade, and many issues remain unsettled. Officials in the region also worry about how to ensure against supply disruptions in the event of political hostilities between India and Pakistan.” More or less the same applies to another multi-country gas pipeline – this one will connect Iran with Pakistan and India. Negotiations for concluding this deal have gone on for years but remain inclusive. Added problem is the pressure by the US is putting on both Pakistan and India not to go forward with this project.

While Pakistan has successfully resisted this pressure, India has been less willing to defy the US. It is deeply engaged in working out the arrangements that will allow the flow of western nuclear technology to India.

Thawing of relations between Bangladesh and India after the return of power of the India-friendly Awami League in Dhaka may result in the building of a pipeline that would connect the two countries. Again, this is one of the projects that have been under discussion but politics rather than economics came in the way. Now that New Delhi has opened a line of cheap Indian credit that Dhaka could use, there is a possibility that the pipeline may get to be built.

Given all these projects now in discussion and planning stages, it would appear that gas pipelines connecting the countries of mainland South Asia may result in building confidence and lead to the development of connections in other energy areas. If that happens, the economies of the region may get to be better integrated.

[url=http://epaper.dawn.com/ArticleText.aspx?article=20_06_2011_605_004]Energy links may reshape South[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Turkey back in the Muslim world[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B]By Shahid Javed Burki
Published: June 26, 2011[/B]

There is no doubt that the year 2011 brought about irreversible changes in the way the Muslim world is organised politically and the way it is likely to shape its relations with the West and in the West, in particular with the US. As the year 2010 gave way to 2011, even the most well-informed Muslim world watchers could not have seen what the next six months would bring. A fruit vendor in a small Tunisian town set himself on fire, not able to live with the insult heaped on him by a police-woman. This act of self-immolation had far-reaching and hard-to-imagine consequences.

Some of the more obvious results have already entered as important markers for the unfolding history of the Muslim world. The exploding streets in Tunisia and Egypt forced out of office long-serving presidents. While Tunisia’s Zine elAbidine Ben Ali has found a sanctuary in Saudi Arabia, Egypt’s Hosni Mubarak was unable to leave the country. He is now facing the courts that he had once packed to serve his regime. He is defending a number of charges, some of which carry the death penalty. A third long-serving president, Ali Abdullah Saleh of Yemen, after having been seriously injured in the bombing of the mosque in the presidential compound, is in Saudi Arabia being treated for the burns on his body. It is unlikely that he will be allowed to return.

Two other regimes — those in Libya and Syria — are under attack by large numbers of dissidents who have drawn courage from the actions of those who were successful in getting rid of the rulers in three other countries. The regimes have managed to survive by using the tactics that kept them in power for so long. The governments headed by Muammar Qaddafi in Libya and Bashar al Assad in Syria have used terror to stay in power. They may have bought some time but it seems unlikely that they will continue to hold on to power when so much change is occurring all around them.

One of these changes is in Turkey, a Muslim country that had once ruled the Arab world as part of the Ottoman Empire. When it was dispossessed of its imperial domain, it tried hard to turn the other way. Kamal Ataturk, the father of modern day Turkey, worked hard to de-Islamise his nation and to associate his country with Europe. But Turkey’s attempt to Europeanise itself was not reciprocated by Europe, especially after Islamophobia became a potent rallying cry in the continent. It was in this state of uncertainty that a new Turkish leader stepped in with a new political, economic and social philosophy. His impact on the Muslim world may also be of as much consequence as that of the explosion in the Arab street. In the elections held on June 12, Recep Tayyip Erdogan and his Justice and Development Party (known by its Turkish acronym, AKP) took 50 per cent of the vote and comfortably retained its majority in the unicameral legislature. The party, whose roots are in Turkey’s Islamic movement, fell shy of the 330 seats needed in the legislature to send for a referendum to make the changes in the constitution written by the military. In fact, the prime minister had hoped for a super majority of 367 seats that would have made it possible to pass the constitutional changes by the parliament acting alone. Mr Erdogan wanted a French style republic with a strong presidency and himself as president. But the verdict from the electorate was clear: It liked the prime minister but wished to give him constrained powers. The re-elected prime minister seemed to have received the message. “We’ll go to the opposition and we’ll seek consultation and consensus,” he said, responding to the results. “We will bring democracy to an advanced level, widening rights and freedoms. The responsibility has risen, so has our humility.” While the exercise of people’s will was open and in full public view, there is a consensus amongst Turkey watchers that the country still had some distance to go before it could become a truly democratic state.

Turkey has important lessons for those busy designing new political systems in Muslim countries where the street won over the establishment. There are also lessons for Pakistan, another Muslim country that is trying hard to find its political feet. The Turks have shown that they can trust a political party that does not profess to be secular; one that has deep roots in the conservative elements within the society. It is of some comfort for the moderates in Turkey that Erdogan’s party has not made any attempt to impose its views on the society at large. It is happy to go as far as the electoral process will let it proceed. Prime Minister Erdogan has handled his relations with the powerful military with great restraint but also with firmness. He was not afraid to push the generals back if they attempted to assert their right to protect what they regard as the legacy of Kamal Ataturk. If ‘Kamalism’ is not what the majority of the people desire, then it would not be forced on them.

What the world is watching with breathless anxiety is the political and social transformation of the Muslim world. Change is occurring all over. The process has begun and cannot be resisted for too long by those who favour the status quo. America under President Barack Obama appears to recognise this and instead of resisting political modernisation in the Muslim world, as it did on several occasions in the past — in Iran, for instance, when Prime Minister Mohammad Mossadegh tried to assert its constitutional authority — it is prepared to go along with it.

[B][I]Published in The Express Tribune, June 27th, 2011.[/I][/B]
[url=http://tribune.com.pk/story/196723/turkey-back-in-the-muslim-world/]Turkey back in the Muslim world – The Express Tribune[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Trade in a changing world market[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 27 June, 2011[/B]

THOSE who have been arguing that the centre of the global economy is moving from the Atlantic to the Pacific normally focus their attention on the sharp differences in the rates of GDP growth between today’s rich countries and those that have been classified as “large emerging economies”.
After the global economy began to recover from the Great Recession of 2008-9, the rates of economic growth for the BRICS picked up to the levels they had attained before the downturn. However, recovery in the developed world has remained sluggish. Some economists have begun to talk about the possibility of a double dip recession of the type that hit the global economy in 1981, some 30 years ago.

These differences in the rates of economic growth have meant that the bulk of the increase in global product is being produced by the emerging world. With this being the case, the share of the BRICS in global GDP is increasing rapidly. Already China has passed by Japan and become the second largest economy. Some analysts including those working at the IMF believe that within a decade to a decade and half, China will overtake the US and become the world’s largest economy.

While the size of the economy and the share in global product matter, what is even more significant is the development of new trading relations among the more rapidly growing economies. This is happening around the globe and we are approaching the time when the emerging markets will do more trade among themselves than with the United States, Europe and Japan — the three centres of the old economy.

“The greatest show on earth is happening elsewhere: the creation of a southern Silk Road, a network of new ‘SouthSouth’ trading routes connecting Asia, the Middle East, Africa and Latin America,” wrote Stephen King in a recent article. He is the Chief Economist of the HSBC group, a bank that has a large stake in emerging markets, and the author of a recent book, Losing Control: the Emerging Threats to Western Prosperity.

China and now increasingly India are at the centre of the new trading links that are being forged around the globe. While the West would like to use India as a check on the economic rise of China, the Indians have no problem in linking up with China to take advantage of the enormous economic power of their large neighbour. China is now India’s largest trading partner having displaced the United States from that position. The same change has occurred with respect to China’s economic relations with Pakistan, South Asia’s second largest economy. Once again China has replaced the United States as the most dynamic trading partner for Islamabad. Both India and Pakistan are China’s immediate neighbours and the commonly used “gravity model of trade” tells us that large countries that share borders or are not very far from each other should do a great deal of trade with one another.This has begun to happen in the Asian Mainland.

But distance is not discouraging China to develop new trading relations. It is jumping the oceans to get close to Latin America and Africa. These two continents have the natural resources that the Chinese need in order to sustain their present high rate of growth into the future. Brazil is an interesting example of the change that is occurring in the global pattern of trade. For the moment 42 per cent of its trade is with the developed world, another 22 per cent with the countries in Latin America, and the remaining 36 per cent with the rest of the world.

If the present trends hold, it is the last of these three patterns of trade that are set to increase significantly, outstripping the trade with the developed world. By the middle of this century, the share of the intercontinental South-South trade in Brazil’s total is likely to be more than 50 per cent. Most of this increase will come from the decline in the share of the old economies.

Increase in commerce brings other changes. Not only are the large emerging economies looking at each other as potential markets.They are also developing other kinds of relationships. Chinese tourists have begun to travel to Africa and Latin America and see the parts of the world that was not within their reach a few years ago.

New air connections are being made practically every day. Qatar Airways, one of the most rapidly expanding airlines in the world now has more destinations in the emerging world than in Europe and the United States. At the recent air show in Paris, airlines from emerging economies were far more active customers than the carriers from the Western world. A private sector airline from India placed one of the largest orders in aviation history for the purchase of planes manufactured by Europe’s Airbus.

Firms based in the large emerging markets have begun to acquire assets in other countries. For instance, the second largest merger and acquisition deal in Brazil last year was between two oil companies from China and Brazil — China’s Sinopec concluded a $7.1 billion deal to acquire a large share in Brazil’s Repsol-YPF.

When nations develop close economic relations they also establish institutional infrastructure to iron out the wrinkles that may arise. The creation of the Breton Woods system in 1946 following the defeat of Germany and Japan was meant to provide an institutional underpinning for minding the evolving relations among the victors.

However, as the struggle over the choice of the new head of the IMF amply demonstrates, well established clubs don’t like to give management positions to new members. The job is likely to go to the woman who is currently the foreign minister of France. Realising that old institutions will be hard to break into, China and other large emerging economies have begun to create institutions of their own from which the old world is being excluded.

BRICS are holding regular summits; the Shanghai Forum does not have the West represented.That said, this approach should not be seen as replicating the Non-Aligned Movement and the G77 when a group of countries not willing to be associated with the major powers, developed relations among themselves that kept them out of Cold War. This time the effort is not to exclude large powers but to create an institutional base that will help these countries to build firm economic relations within their own ranks.

[url=http://epaper.dawn.com/ArticleText.aspx?article=27_06_2011_606_004]Trade in a changing world market[/url]

Afghanistan and the US troops’ withdrawal
 

[B][U][CENTER][SIZE="5"]Afghanistan and the US troops’ withdrawal[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: July 4, 2011[/B]

The American leadership positioned in Afghanistan was confident that it had turned the Taliban tide in the country. It was reluctant to lose that advantage by too precipitous a withdrawal. One indication of success was the relative quiet in the southern districts bordering the province of Balochistan in Pakistan. According to a recent New York Times (NYT) report, “the poppy harvest is over and the fighting season has arrived in southern Afghanistan — except this year the Taliban have not returned in their usual numbers to intensify the war”. This change in what had been the normal pattern was ascribed to the presence of large American troops in the region. The change was palpable not only in the province of Helmand that had been since long a strong base of support for the Taliban. It was also apparent in the neighbouring province of Kandahar, the heartland of the insurgency. “In both places, the insurgency is now mostly limited to small groups of local fighters who lay mines or carry out assassinations or suicide bombings in the cities, attacks that are more important psychologically than strategically,” said the same report.

The weakening of the Taliban presence allowed some signs of the government’s presence to re-emerge. Hundreds of Afghan police officers guarding outposts along the main road allowed traffic to flow again, while crews began clearing the irrigation canals that run along the road. For a number of years, roads were dominated by the Taliban who used roadside bombs to discourage people from using them. Lack of maintenance of the irrigation system affected agriculture and crop productivity. These improvements made it possible for people to return to work.

Development aid provided by the Americans and their allies to the southern provinces also helped. Helmand received the most aid per capita of any province in the country in 2010. Aid projects to pave roads, dredge canals, construct schools and clinics improved economic life in the area by providing thousands of new jobs.

Will this success be maintained now that the American pull-out is underway? The answer to the question depends on a number of factors. The most important of these is the manner and speed of the pull-out. It is unlikely that having achieved some success in the south, the Americans will abandon the area in order to satisfy a political timetable of their own. The Afghan forces may be much more developed than was the case six years ago but they were still not strong enough to prevent the Taliban from re-entering the area as they had done in 2005, when the Americans withdrew some of their forces in order to fight the war in Iraq.

The United States and Nato aimed to build up the Afghan Army and the police to a force of 395,000 by 2014, the year by which all foreign troops were to leave the country. But at issue was the competence and loyalty of the Afghan force. Loyalty became a real concern once some soldiers trained by the US and Nato turned their weapons on their benefactors. According to another NYT report, “since March 2009, at least 57 people including 32 American troops have been killed in at least 19 attacks in which Afghan service members had turned their weapons on coalition forces. Another 64 were wounded. More than half of the casualties in the first five months of this year, signalling an escalation in the number and intensity of the attacks. But while the Taliban often take credit for these attacks, Nato officials say the majority of the episodes stem from disagreements and arguments that escalate into violence.”

Also troubling for the government was the heavy loss of innocent lives as result of Taliban activity and the military effort by the United States and its allies. According to the United Nations, May 2011 was the deadliest month for Afghan civilians since it began to keep count in 2007. It estimated civilian deaths during the month at 368. “The majority of the casualties, 82 per cent, were caused by Taliban and other militants, while 12 per cent were caused by Nato troops and Afghan force; in six per cent of the cases, it was not clear who was responsible.” The Taliban continued to target security forces as well as those whose beliefs differed from their own. For instance, on June 11, they attacked two buses that were carrying members of two families who were travelling to a shrine in Kandahar province to pray for the health of a sick child.

The uneasy relationship between Afghan President Hamid Karzai and the American government became even more uncomfortable as Washington inched closer to making the decision about the number of troops it planned to pull out of the country starting July 1, 2011. On July 18, reports said Karzai “appeared to have crossed a line” when, in “a rambling speech” to a youth convention in Kabul, he accused the United States and other western allies of using his country for their own purposes. He asserted that they take away more money than give, pollute Afghanistan’s environment and ‘dishonour’ the Afghan people. This was not the first attack by him on the US and its Nato allies. According to reports, in an “emotional speech” in the eastern city of Asadabad, he called for Nato and the United States to stop military operations in Afghanistan; officials later issued a clarification, saying he was referring only to operations that caused civilian casualties. At a news conference in May, he threatened to denounce Nato as occupiers if they did not stop air attacks that caused civilian casualties. That was in response to an air strike in Helmand province that was aimed at Taliban insurgents but killed several civilians, including women and children. On at least two occasions, most recently in April, Mr Karzai has threatened at closed-door meetings of parliament to join the Taliban, according to published accounts.”

Given this background, Afghanistan is not likely to move on a smooth road once the Americans begin to pull back.

[B]Source: [URL="http://tribune.com.pk/story/201677/afghanistan-and-the-us-troops-withdrawal/"]Afghanistan and US troops withdrawl[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Averting world recession[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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

A GREAT deal of excitement that resulted from the fast recovery of China and India from the Great Recession of 2008-09 has begun to dissipate. Both countries raced forward while much of the industrial world continued to languish.
There is now some talk of the possibility of a double-dip recession in both America and Europe and some weakening in the large emerging world economies. The global economy is not proceeding in the direction in which it was supposed to go.

As the rates of GDP growth diverged in the West and in the large emerging markets there was talk of a faster-than-expected realignment of the global economy. There was expectation that the centre of gravity of the global economy would move from the Atlantic to the Pacific within a decade or two. Now both parts of the world economy are hurting but in different ways. The West is worried about the burden of debt carried by a number of economies that is not sustainable over the medium-term; the emerging economies are concerned with rising levels of prices.

According to the Bank of International Settlements (BIS), Germany’s gross public debt is 87 of its GDP; Japan’s 213; Britain’s 89; and the United States’, 101 per cent. The levels of debt in Greece, Ireland, and Portugal are much higher – high enough to trouble the bond markets and hence the ability of these countries to borrow in order to meet their obligations. But in the West, inflation is not a problem. In fact the Federal Reserve Bank, the American central bank, launched a programme called “quantitative easing” aimed at preventing deflation from further hurting the economy.

The situation in the emerging world is very different. While Pakistan has lagged behind other large emerging countries in terms of rate of growth of its economy, there is no reason why it should not attain the rates of growth that seem structurally possible in the South Asian mainland.

This means that its economy should be able to grow at rates between 6--8 per cent a year. However, for that to happen its political structure must develop further, it should be able to hold its leaders and other functionaries of the state accountable for their actions while they hold office, and it should be able to resolve the unsettled relations between the military and the civilian authority.

At the same time, it must develop closer economic relations with its two giant neighbours. Both China and India are now among the fastest growing economies of the world. They are also very large. How their economies evolve in the future will matter for Pakistan.

Both China and India are finding it hard to manage rapidly growing economies without igniting inflation. Both have decided to focus on monetary management as the way for taming price increases. And both are finding that this cure may not deliver the results they seek.They need deep structural changes in order to ensure that the momentum of growth is not lost.

For political reasons, both China and India need to have their economies grow at or near 10 per cent a year. China needs a high growth rate to contain discontent among its workers. The regime has allowed some expression of unhappiness on the part of the working population.This has had the result of increasing wages by significant amounts and would change in quite a dramatic way the contours of the model of growth the country has followed for several decades. It is unlikely that future growth can come from investments that produce cheap goods for western markets by low paid labour.

In India, coalition politics has delayed actions on a number of fronts without which the potential of the economy would not be realised. If the economy softens, it will have political implications for the governing coalition. India needs growth to address the problem of poverty as well as inter-state and inter-personal income distribution disparities.

While China passed the 10 per cent growth target on several occasions, India remains below that threshold. The recent changes in interest rates ordered by the Reserve Bank of India, India’s central bank, has had the effect of reducing the rate of investment and hence the rate of future growth in its domestic product. But it has not succeeded in controlling inflation. Both food and core inflation rates have passed the levels regarded as economically and politically sustainable. China has used a combination of monetary tightening as well as administrative controls to tame inflation. Both China and India are not succeeding in these endeavours.

What is needed in both countries is a combination of short-term adjustments and longterm structural changes. China needs to prepare itself for the time when it will no longer be an export powerhouse exploiting its low wage workforce.The assumption that the presence of hundreds of millions of workers in the countryside who will be prepared to move to the relatively high productivity sectors of the economy and thus continue to contribute to growth proved not to be realistic.

The spread of new information technologies has meant that the aspirations of the workers in the modern sectors could not be separated from that of people who remained in the countryside.There is now a widespread demand for improvements in the living standards of all workers which even a tightly controlled political system cannot ignore. This means a significant restructuring of both the sources of supply and demand in the country.

China must begin to refashion its economy in order to satisfy meeting rapidly rising domestic demand and not just continuing to provide for the western markets that are now less hungry for cheap Chinese products.

There are somewhat different demands being placed on the Indian economy and the political system. Perhaps taking their cue from the explosion in the Arab streets that produced what is called the Arab Spring, citizens in India are also prepared to come out in large numbers and ask for higher quality of governance.

Over time India has developed a political system that has shown that democracy in the developing world need not retard economic progress. It must now move this system forward so that it becomes more accountable to the people. The country cannot afford to wait for periodic elections to cleanse the system. It must also have the institutional wherewithal to hold those placed in office by elections to satisfy the public demand for cleaner governance.

There is also the need in India to further open its economy. It was the dramatic opening in 1991 that produced the Indian miracle of the last two decades. But further opening is required for India to take advantage of the rapid changes in the structure of the global economy. Foreign capital inflows must not be deterred by populist demands that have made it difficult for large retail firms to set up shops in the country and for manufacturing enterprises to acquire land for building new, green-field plants.

What the world needs now is a new way of handling the problems being confronted by its different parts. Unfortunately for different reasons, the political establishments in almost all the major world economies don’t seem equal to the task of managing the needed structural change.

China and India pursued to different political models to achieve the same economic results: high rates of GDP growth. Now that their economies have matured they will need to pursue different policies to smoothen out the wrinkles that have appeared.

[url=http://epaper.dawn.com/ArticleText.aspx?article=04_07_2011_606_002]Averting world recession[/url]

What the new ‘catch-up’ period is likely to bring
 

[B][U][CENTER][SIZE="5"]What the new ‘catch-up’ period is likely to bring[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: July 12, 2011[/B]

One distinguishing feature of the profound adjustments taking place in the global economy from those that occurred in the previous catch-up periods is that new world economic leaders will be structurally very different from those of the past. The race to the top in the previous catch-up periods involved countries that had the same economic and social characteristics. Some of them had been rivals for long but one took off, leaving the other behind. This was the case with Britain in the 18th century, which, for societal, institutional and technological reasons, took a lead over the European economy. Britain’s rapid advance created incentives for the countries that had lagged behind to catch-up. Different strategies were adopted by different countries. As economic historian Alexander Gerschenkron pointed out in his seminal work on economic backwardness, the state played an active role in getting the laggards to catch up with the front-runner: France with Britain and then Germany with both Britain and France.

In the current catch-up period, the two countries that are rapidly moving forward in the global economy are very different from those they have replaced as leaders, or are in the process of replacing. They have very large populations. China in 2009 had a population of 1,373 million, more than four times that of the current leader, the United States. China’s gross national income (GNI) was estimated in 2009 as $9.3 trillion in purchasing parity terms, and income per head at $6,770. On the other hand, per capita income in the US was $46,730, about seven times as large as that of China. India, with a population of 1,155 million, GNI of $3.8 trillion and GNI per head of $3,260 had the same economic characteristics as China’s. In other words, both China and India are significantly different from the previous leaders of the global economy — the US, Japan and some of the large countries of western Europe.

There are three important socio-economic differences among the new and old leaders of the global economy that will profoundly affect the way they will interact with one another in the years ahead. The first is what Alan Greenspan, once the acclaimed chairman of the US Federal Reserve System, had called the ‘weight’ of the gross domestic product (GDP). By that he meant that the GDP in developed countries, with a much larger share of services, which in turn drew much of their value from knowledge, was much lighter than those produced by the relatively less advanced economies such as China and India. Consequently, as the use of natural resources such as energy and minerals per unit of output was much larger for the latter than the former, pressure on them will increase over time with much large rates of economic growth in emerging countries.

The other two differences are demographic. China’s population growth in 2000-09 was 0.6 per cent a year, India’s 1.4 per cent. While the rate of increase in the American population of 0.9 per cent lies between that of China and India, those of Germany, Japan, France and the UK are tending towards zero growth. In 2000-09, the UK’s population was growing at 0.5 per cent a year; that of France at 0.3 per cent; of Japan at 0.1 per cent and of Germany at zero per cent. In other words, the developed world was approaching the stage where there will be little or no increase in the size of the population, while some populations may even begin to decline.

On the other hand, even with declines in the rates of population, the more populous countries in Asia are adding tens of millions of people to their already large populations. In 2011, for instance, China and India together will add more than 20 million people, Pakistan another 3.5 million. This demographic asymmetry will have profound implications: It will result in increasing the dependence of the currently rich countries on the work forces available in large emerging nations. As former President Bill Clinton pointed out recently in a detailed interview with an American news magazine, “There is a simple way to get Americans back to work: Make it easier for talented foreigners to come here and work.” Much of this talent is available in Asia, surplus of its albeit growing needs.

The third difference is that while today’s developed countries are already mostly urban — when people move in these countries, they mostly go from one urban area to another — in the emerging world, hundreds of millions of people will leave the countryside for towns and cities. In the next two decades, by the year 2030, a billion and half people will be in the urban areas of China and India, demanding the kinds of services and products already available in the developed world. This will change in a significant way the structure of world industrial and agricultural output and the pattern of international trade.

As we know from world economic history, such large adjustments in relative economic power seldom occur without serious conflict between those who are losing stature compared to those who are gaining it. Will something similar happen this time around? The situation in the early 21st century is compounded by the competition among large economies over the world’s fast depleting non-renewable resources. Oil is the obvious commodity facing a serious supply stress but there are a number of other commodities that have reached the same situation. Since there are reports of the presence of large deposits of important minerals in both Afghanistan and Pakistan — in fact, a Pentagon report published by The New York Times in the summer of 2010 said that the “US has discovered nearly $1 trillion in untapped deposits in Afghanistan, far beyond the previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself” — there is considerable interest on the part Beijing to gain access to them.

[B]Source: [URL="http://tribune.com.pk/story/206705/what-the-new-catch-up-period-is-likely-to-bring/"]New Catchup Period[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Remittances and the Pakistani diasporas [/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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

PAKISTAN’S dependence on remittances has increased as some other sources of finance have either dried up or proving difficult to access. It would be hard and expensive to tap funds to fill the large financing gap — the gap between export earnings and what is needed to pay for imports and also the amount required to service debt.
Non-project aid, particularly from the United States, has slowed down to a trickle as the relations between the two countries continue to proceed on a downward slope.

The IMF remains unhappy with Islamabad’s performance in mobilising domestic resources for de velopment. The institution wants an effective tax on consumption which the policymakers find politically difficult to deliver.

Project assistance is available from China and the two development banks — the World Bank and the Asian Development Bank — but this form of capital disburses slowly and is thus not particularly helpful in closing the financing gap. This makes remittances from the eight million or so Pakistanis living and working abroad as one source of foreign assistance that helps to cover the country’s needs.

Of late while foreign investors have either left Pakistan because of the worsening security situation or because they don’t see the economy offering the opportunities available in other countries, the Pakistani diasporas continue to send back increasing amounts of foreign capital to the country.

For 2009, the World Bank estima ted Pakistan’s receipt from remittances at $8.7 billion; in 2012, the State Bank of Pakistan believes that the flow will reach $12 billion. In 2009 as shown in the accompanying table, remittances were equivalent to 5.1 per cent of the Pakistani gross national income (GNI). The proportion was higher than the average for South Asia.

The sizes of the Pakistani diasporas across the four continents of Asia, Africa, Europe and North America can only be roughly estimated.The government does not maintain data on migration stocks in various destinations popular with Pakistanis. A combination of data from various sources, including the United Nations and the World Bank along with anecdotal evidence from various embassies in the countries where Pakistanis are present in large numbers suggest that about eight million people of Pakistani origin are living and working abroad. The largest proportion of these — about five million — are in various countries of the Middle East. Britain with 1.2 million has the second largest concentration and the United States with about 0.9 million comes in third.

While there was some out-migration from the parts of British India that are now Pakistan, most of the current large diasporas were formed after the country gained independence. Both pull and push factors have contributed to the formation of Pakistani communities outside the country’s borders. The current outmigration is largely the consequence of the push from Pakistan – a very large proportion of people leaving the country do not see good economic prospects for themselves if they stay behind.

In the five year period between 2005 and 2010, Pakistan was among the four countries across the globe that had more than one million people migrating to other countries. With a net outmigration of 1.4 million in this period , Pakistan was the third largest contributor of outflow in the world.

The largest number came from Mexico (2.43 million) with China in the second place (1.73 million). India with a total net outflow of one million people was well below Pakistan in this respect. The reason why a smaller number of Indians are now moving abroad is that they have more confidence in their country’s future.

With fairly tough restrictions having been put in place by the United States and Britain, outmigration destinations have become limited for the people of Pakistani origin. This is another toll that the rise of the Islamic extremism has taken on the Pakistani economy. Economists now consider out-migration in a positive light. It has proved to be an important contributor to the efforts to alleviate poverty.

Wages in the developed world for the kind of jobs available to the migrants with relatively low level of skills are about 15 times of what they can hope to make at home and that too if they are able to find employment. According to one estimate, “completely open borders would add an astonishing $39 trillion over 25 years to global economy. This is more than 500 times the amount the rich world spends on foreign aid each year. Migration is the most effective tool yet devised for reducing global poverty.” But extraordinarily positive results are available if migrations draw upon people with low levels of skills. They are usually a burden on the domestic economies but provide badly needed services in rich countries. For instance, very large number of the workers in the sectors of agriculture, construction and domestic services in the United States are from relatively low income countries in the neighbourhood. But this type of workforce is not likely to be admitted into the US from Pakistan.

There is another type of movement of people from South Asia that is underway at this time. Its destinations are the city states in East Asia that are aggressively building their service sectors in response to the opportunities created by the restructuring of the global economy. For instance, Singapore aims to become a financial centre; a centre for high-tech industries in the fields of information, communication and health; and a centre of entertainment that includes gambling to cater to the interests in various table games of the people from the countries in the region. Similar developments are taking place in the several city states in the Middle East. These new economic sectors need very large number of highly skilled people. They are moving from rich countries as well as from South Asia. This flow of people from developed countries is the first time since the period of European colonisation in the 18th and 19th centuries that such workers are coming to the developing world in search for jobs.

There are two conclusions that can be drawn from this brief discussion of the contribution that diasporas of Pakistani origin are making. Both are positive when viewed from two different perspectives.The remittances being sent back by these communities are critically important at a time when the country has a very limited recourse to other sources of finance.

Second, outmigration has contributed enormously to keep many people out of poverty. Movement of construction workers with low level of skills contributed to alleviating poverty in some of the poorer areas of the country.

Notwithstanding these positive developments there are some worrying trends. Current policies in many labour importing countries have made it very difficult for the Pakistani poor to migrate while the demand for the highly trained workers remains relatively high. This may keep the level of remittances high but would reduce the impact of migration on poverty.

[B][U][CENTER][SIZE="5"]America-Pakistan ties — where are they headed?[/SIZE][/CENTER][/U][/B]
[B]
By Shahid Javed Burki
Published in Express Tribune, July 18, 2011[/B]

Although history may not always repeat itself, it does provide some clues about the future. Pakistan’s relations with the United States have taken a nosedive in the last few weeks. How sharp the descent has been, has surprised many — if not most — observers. It would be instructive to go back to history to remind ourselves why Pakistan became such a close American ally more than half a century ago.

When the British left two parts of their Indian domain that had with Muslim majorities, in the hands of a Muslim elite, they helped found a state that proved not to be viable. It was also a state that was not welcomed by the much larger part of the British Indian colony — the India of today. This bred a sense of deep anxiety among those who governed Pakistan during its formative years. There were two outcomes: A deep suspicion about India’s intentions towards it Pakistan, and a deep yeaning to find friends outside the borders that could produce a feeling of security.

There were four states in the new country’s immediate neighbourhood. India, China, Afghanistan and Iran. Modern China was still not born when Pakistan achieved independence. It was only on October 1, 1948 that the communist party led by Chairman Mao Zedong marched into Beijing and took over the reins of a vast country in total disarray. For the new government in Beijing, the first task was to stabilise the country, not to form alliances with its many neighbours.

Afghanistan was deeply hostile to the creation of an independent state that had a large proportion of Pakhtuns in its population. There were, at the time perhaps five million Pakhtuns residing on the other side of the border drawn by the British and forced upon Kabul. The rulers of Kabul wanted to redraw the Durand Line — the border left by the British between Afghanistan and Pakistan — and push it, as far as possible, towards the western bank of the Indus River. In those circumstances, Afghanistan could not be a friend of Pakistan. Finally, there was Iran. This was the only predominantly Shia state in the Muslim world. It had an uneasy relationship with its Sunni neighbours. There were, thus, good reasons why Tehran did not immediately open its arms to receive a new Muslim state. Pakistan, in other words, was cast into an uncomfortable geopolitical environment.

Anxiety about perceived Indian intentions was one reason why the first generation of Pakistani leaders felt the need to cultivate foreign states as friends. The other was economics. Pakistan had been founded on the basis of a promise to provide better economic conditions for the Muslims of British India. This meant accelerating the rate of economic growth in what was once the poorest part of the subcontinent. The rate of domestic savings was low; certainly not high enough to produce a rate of GDP growth that would help to alleviate poverty. The only way option was to augment domestic savings with foreign flows. At that time, the world had as yet to organise itself to provide cheap development finance to poor countries — for instance, the establishment of the International Development Association was still a decade and a half away. Approaching some rich countries as benefactors was one way of dealing with the situation. The US appeared to be a good candidate to play the role of a rich uncle.

Washington, too, had begun to develop an anxiety of its own. It was deeply suspicious of the intentions of the Soviet Union, its erstwhile ally in the Second World War. The defeat of Germany had opened an opportunity for the government in Moscow that, led by President Joseph Stalin, was able to fully exploit. While London and Washington watched helplessly, the Soviet Union expanded and consolidated its hold over Eastern Europe. In a way, the Soviet Union emerged geographically stronger compared to its former allies. The US made no territorial gains and the UK lost a good part of its empire in 1947, only two years after the collapse of Germany in Europe. Accompanying these changes was the communist advance in East Asia. Mao Zedong’s forces were advancing in China while Ho Chi Minh had begun to threaten France’s hold over Vietnam and the rest of Indo-China. The only option Washington felt it had to deal with this developing situation was to throw a set of chains around the countries that had fallen to what it saw as the communist menace.

John Foster Dulles, secretary of state in the administration headed by President Dwight Eisenhower, built three chains around the Communist world: The North Atlantic Treaty Organization, (Nato), for Western Europe; the Baghdad Pact, later renamed the Central Treaty Organization, (Cento) for the Middle East and West Asia; and the Southeast Asia Treaty Organization, (Seato) for East Asia. Pakistan joined the last two, thus becoming an important link in the chains to contain the spread of communism.

Pakistan’s entry into these alliances was not motivated by ideology or any fear about the advance of communism into its territory. The first generation of country’s leaders had other worries. They were busy creating a new central authority where none existed. They had to settle eight million Muslim refugees who had arrived as total destitutes from India. Economic stability and territorial integrity thus were the main concerns of the fledgling government. A close alliance with the US promised help in both areas.

The situation has not changed since then. More than six decades later, as the world around it is being rapidly reshaped, Pakistan still remains deeply concerned about these two elements pertaining to statecraft. It remains nervous about the intentions of most of its neighbours. And it is still woefully short of resources with which it can build a strong economy. Half a century ago, the US was the only country that could provide some comfort in both these areas. But that seems unlikely now. Given this, what are the options available to Pakistan today? This is a question I will take up in this space next week.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]How dependent is Pakistan on US aid?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

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

JUDGING from the debate in the electronic and print media in Pakistan on the US decision by the US authorities to hold back disbursements of $800 million owed to the country, there seems to be a state of panic amongst reasonably well informed people of the likely impact on the economy.
The American decision signals to the authorities in Pakistan that they cannot – in fact should not – rely on a regular flow of funds from the United States. Telephone calls from the news media for comments on the American decision came to me while President Barack Obama was giving a live press conference on the state of his discussions with the leaders of the Republican Party about getting from the US Congress an increase in the country’s debt ceiling.

Without such an agreement, the United States would have reached the legally authorised debt limit on August 2 and will have to default on which ever foreign or domestic obligation that had to be honored that day.

America had never defaulted before and if it did no body was prepared to guess what would be the implications for the global economy not to mention the consequences for the US economy. Given the importance of the matter the American president was discussing with the press, it was interesting to note that the TV channels found the news about the likely cut in US aid to Pakistan to be important enough to run it on the moving sticker at the bottom of the screen. This raises the obvious question: should the policymakers in Pakistan panic?

The simple answer is no and that is for two reasons. First, let us put the $800 million that was being put on hold in context. Pakistan is currently running a fiscal deficit of 6- 7 per cent of its GDP of some $170 billion. This means that it needs to find some $10-12 billion this financial year to close the gap between government expenditures and government revenues. This is a large amount but $800 million is in the neighbourhood of seven per cent of the expected deficit. Keeping that from coming to Pakistan won’t break the back of the economy.

The second deficit to be concerned about is in the current account. This is the gap between what the country pays for the import of goods and services and for servicing foreign debt and what it earns from abroad. This year the gap is estimated at about five per cent of GDP or about $8.5 billion. If the entire amount put on hold by the United States was used for closing this second gap, it would be equivalent to a bit less than 10 per cent. This amount not becoming available won’t break the economy’s back either.

The other thing worth noting about this amount is that it is strictly not economic assistance. A part of it is for payment for the services the Pakistan military has already provided to the American and NATO forces operating in Afghanistan and part of its is to pay for the equipment the military would like to purchase from the United States. Legally the United States cannot hold back the amount which has been spent as a part of a binding agreement. Of the $800 million not being paid, significant amount cannot be held back for long. The other bit is for military purchases. There are reports that the Pakistanis no longer want to acquire some of this equipment, not sure whether its availability would not be interrupted at some day. They may be turning to the Chinese as the more reliable source of supply.

For the moment, it does not seem that the Americans are putting a hold on economic assistance being provided under the Kerry-Lugar bill approved by Congress in 2009. This committed $7.5 billion of grants to Pakistan over a five year period, is for financial years 2009 to 2014.

Congressional commitments, under the US law, do not mean actual disbursements. This only happens when a particular item gets included in the budget for the year. Given the American unhappiness with Pakistan these days, it would not be surprising if these get excluded or significantly reduced under the annual budgeting process.

Since both the administration and Congress are working on reducing government expenditure and since there is not a powerful constituency for foreign aid in the American legislature, it would be a miracle if Pakistan is given the promised amount. To bank on the receipt of this money year after year would not be prudent for the people managing Pakistan’s finance.

If the assistance from the US does begin to flow it should be treated as a wind-fall gain rather than as a component of normal revenue availability to run the government and get the economy moving again.

However the financial flow that matters for the health of the economy is the one promised by the IMF. The iamount was $11 billion to be disbursed over a period of two years starting in late 2008. More than $7 billion was released; leaving $4 billion that got stalled. It was stopped since Pakistan did not fulfill one of the more important conditions imposed by the Fund.

Islamabad promised to raise the woefully low tax-to-GDP ratio by reforming the fiscal system. Since bringing more tax payers into the system would have proven politically problematic, both sides – Pakistan and IMF—agreed to tax consumption.

Ideally this should have taken the form of a value-added tax, the VAT. But the tax acquired a bad name in the country. Its purpose and the method of collecting it were both poorly explained and deliberately distorted.The government settled instead for what it called the General Sales Tax which got transformed into RGST or reformed general sales tax. The “reform” appellation referred to the elimination of some loopholes, elimination of some exemptions, and extending the tax to the serve sector.

But RGST also proved to be politically difficult to impose. Most of the opposition to the tax was due to the impression that that it would add to the rate of inflation which was already very high. There was also opposition from the provinces that saw the sales tax as a provincial levy and not a tax that could be legitimately collected by the federal government. These problems meant that Pakistan continued to miss the deadlines laid down by the IMF which has refused to start releasing funds from the blocked account.

It would be wiser for the government and the citizenry not to worry about the American threat to slow down the flow of funds to Pakistan. They should worry much more about the policy failure that has led to the freezing of disbursements from the IMF. Since these are tied to the reform of the tax system, politicians should have both the wisdom and the l nerve to convince the voters that without a fundamental restructuring of the tax system and the tax code, Pakistan cannot put its economy on a trajectory that would take it towards sustainable high rates of GDP growth.

The Fund had offered an opportunity for doing precisely that but the country let it pass. Instead of putting its effort where it is needed the most, both the government and the people are prepared to heap blame on Washington for the poor performance of the economy. Not mobilising resources from within the economy and continuing to blame foreigners may be politically expedient but is a short-sighted strategy for producing economic growth.

[url]http://epaper.dawn.com/ArticleText.aspx?article=18_07_2011_606_002[/url]

Where do Pakistan and US go from here?
 

[B][U][CENTER][SIZE="5"]Where do Pakistan and US go from here?[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published in Express Tribune July 25, 2011[/B]

The situation in which Pakistan finds itself today, as it forges a new relationship with the United States, is very different from the one that led to a tight embrace between the two countries more than half a century ago. Then, both needed each other. Pakistan was seeking a partner that would help build up its defences against India. The first generation of Pakistani leadership did not fully trust their neighbour’s intentions towards the new state they were hard at work to establish. Pakistan also needed finance to quicken the pace of economic development. The United States needed a partner in South Asia, which could be a part of the virtual wall it was erecting against the spread of communism.

Now more than 50 years later, it would not be an exaggeration to say that Washington needs Islamabad more than Pakistan needs the United States. Even after the death of Osama bin Laden, the Americans remain apprehensive about the harm Islamic extremists could do to its economic and political interests around the globe. Terrorism experts believe that Pakistan is now the epicenter of international terrorism inspired by Islamic fundamentalists. But Pakistan is not alone; there are other even more unsettled places around the world — Afghanistan, Yemen, Somalia to name three but perhaps also Libya, Iraq, and Syria if the current unrest in these countries cannot be brought under control — that could become exporters of terrorist activities. America and Europe are keen on throwing a fence around this troubled area and both believe that Pakistan could be a critical partner in such an enterprise. Pakistan, however, would like to partner but on its own terms.

There are at least three items in Pakistan’s term sheet for cooperation with the West. The first is that the announced pull out from Afghanistan by the United States should not leave a regime in Kabul that would be openly hostile to Pakistan. There was such a regime in place for 30 years, from 1947 (the year of Pakistan’s founding) and 1978 (the year the Soviet Union moved into Afghanistan). Then Kabul campaigned actively for the creation of an autonomous Pakhtun state that would extend to the western bank of the Indus River. It would also not want an Afghan government that was very closely aligned with India. That said, the change in thinking on security issues in Islamabad does not preclude a tripartite arrangement involving Afghanistan, India and Pakistan, in which all three countries work together to collectively promote their economic interests. Building of cross-country pipelines would be an important part of such an arrangement. Sustainable economic growth at reasonable rates will not be possible in mainland South Asia, unless a way is found to resolve critical shortages of energy. One way of doing this is to import natural gas through pipelines that would connect the area with energy-surplus Central Asia and the Middle East.

The second item on the Pakistani term-sheet, is to ensure a steady flow of foreign capital to augment its very low levels of domestic savings. Even if the country embarks on a structural adjustment program that would bring about increases in the rate of domestic savings and tax-to-GDP ratio, foreign flows would still be required for many years into the future. In that context the United States has been an unreliable partner.

The third item is Pakistan’s requirements that the United States desists from those acts that add to the state of fragility in the country. Some of the US sponsored activities in recent months fall into this category. For instance, CIA agents are operating freely in Pakistan — as The Economist wrote in a recent issue there were “CIA agents who roamed across cities without the oversight of local intelligence agencies.” One of them — a man by the name of Raymond Davis — murdered two individuals in broad daylight on a busy Lahore street. He was let go after spending several weeks in a Pakistani jail. The same issue of the magazine expressed surprise at the gathering in the compound of the American embassy in Islamabad of gay, lesbian, bisexual and transgender people. It wrote: “Even at the best of time it would have been unusual for America’s embassy in Islamabad to organise (such a meet). Given the grim state of bilateral relations, the meeting looked downright provocative. Some in Pakistan’s religiously conservative society accused America of conspiring to attack them by spreading outrageously liberal sexual views. One Islamic political party called it ‘cultural terrorism’”.

Most in Pakistan, including the country’s civilian leadership and the military establishment, believe that an alternative is available to which Islamabad could now turn more openly. In recent months, a number of senior people from Pakistan have gone to Beijing hoping to cultivate a relationship that will be more durable and less demanding. This year Pakistan will be celebrating the fiftieth year of the establishment of a formal relationship with China. This will be done with great fanfare and will no doubt bring in more indications of Chinese economic help and military support. To distinguish its relations with Beijing, Pakistan has begun to call it an ‘all-weather friendship’. Three weeks after the death of Osama bin Laden, Ahmad Mukhtar, Pakistan’s defence minister announced that China would take over the management of Gwadar, a deep-water Pakistani port on the Arabian Sea. The port is currently managed by a company from Singapore. But there was some confusion about what had transpired. According to one western newspaper, “the government in Beijing said the Gwadar takeover had come as news to China”. Even if the claims Pakistan was making about China’s interest in their country are somewhat exaggerated, it is clear that a tilt has occurred. There cannot be any doubt that Islamabad was moving away from the United States and was leaning towards China. Such a move will have profound implications not only for South Asia but for the evolving world political order as well.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Another kind of business fear[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 25 July, 2011[/B]

PAKISTAN today has the youngest population of all countries with more than 100 million people. The median age of the population is only 21 years. This means that some 90 million people in the country are below that age.
A large and young population is one of the important sources Pakistan can deploy to achieve not only a high rate of growth but also to create an economy that will generate well paid employment for its youth.

One reason why Pakistan’s income distribution is worsening is that the more traditional sectors of the economy deliver larger returns to the owners of assets. Workers are poorly compensated.

To have the workers receive more the country should change its economic strategy. That would mean treating the large human resource as an important factor of production and encouraging the establishment of industries that are labourintensive.

However, the labour that needs to be employed should be well trained and skilled. This means encouraging the development of modern services.

Among these the more important ones are information and communication, health and education, tourism and entertainment. But the demand for these kinds of industries is mostly in more developed countries.

They cannot be built on the basis of relatively small domestic markets. And this is where Pakistan is facing a serious problem.

There is a sense of fear that has begun to permeate businesses that that may begin to lose their clients. This is particularly the case with those enterprises that have clients outside the country. For some businesses – the IT sector in particular –most of their clients are in countries other than Pakistan while the work itself gets done here. The firms operating in this area are fearful that they may not be able to keep the buyers of their services if the security situation does not improve quickly. This will require a great deal of effort by the government, (a subject to be dealt later in the article). It will also requiring convincing international businesses that by getting work done in Pakistan, the supply chain on which they are dependent will not be seriously affected by terrorist activities.

That the country is hurt badly from this perception is illustrated by a comparison with India which does not suffer from the same kind of perception problem that is affecting Pakistan. India expects revenue from the IT sector to increase by 15 per cent to about $70 billion in the year to March 2012. N. Chandrasekaran, the head of Tata Consulting Services, India’s largest IT outsourcing group, delivered an upbeat assessment a few days ago of not only his own company’s prospects but that of the entire sector. He expects to see a steady demand for its services if the managements were more agile and entrepreneurial.

This would involve the Indian companies setting up operations in other emerging economic such as Mexico and Brazil. That would not only service the growing demand for IT services in these countries but also pick up business from multinationals that were moving their operations overseas. Tata Consulting aims to increase its emerging markets revenue to 30 per cent in the next five years from 17 per cent now.

Some of the pressures being felt by the Pakistani companies doing business abroad are also affecting firms in India. It is important not only to have foreign customers send their officials to the countries where exports are generated but al so to have the exporting enterprises send their own people abroad. It is well known that the businesses here are hurting since they face enormous difficulties in obtaining visas to have their employees travel to the West, in particular to the US. But Indian companies are also feeling the pinch.

According to one assessment, rejection rates for applicants from India are running at almost 40 per cent, up from five per cent only 18 months ago.

This is one of the issues that were taken up by the Indian government and the business owners during the US Secretary of State visit to India for three days in late July.

Her stay in India included a visit to Chennai, an important IT hub in the country. There the managers of the IT companies pressured Mrs Clinton to ease visa restrictions and allow an easier flow of Indian business managers and workers to and from the US.

She promised action in the area by her government.

What then can the Pakistan government do to help the enterprises in the modern services sector to improve their situation? Of the several initiatives the government can take, four can be mentioned here. The first is a more active role by Islamabad to change the perception about Pakistan as an unsafe place not only to do business in but also to make it a part of the international supply chain.

The government could hold a conference to which some of the more important global companies should be invited to show-case the country and to send the message that repeated acts of terrorism notwithstanding, businesses continue to operate.

There is also terrorist activity in India. Maoists are active in many Indian states and they have killed many people including the members of security forces.

However, their operations don’t get the kind of play in the western press that happens in the case of terrorism associated with Islamic extremists.

Second, the government should work with the western governments to get their airlines to come to Pakistan. For the last several years, Pakistan has become isolated and detached from most of the world. To travel from the West means going through various Middle Eastern airline hubs. No American or European airline flies directly to Pakistan.This contributes to the impression that for business purposes Pakistan is an unsafe place.

A more imaginative way of dealing with the situation would be to partner with some of the agencies in the business world that provide guarantees to their businesses. Two such agencies in the US – the Overseas Private Investment Corporation (OPIC) and the Export Import Bank could be persuaded to create a special facility to cover the operations of foreign firms doing business in Pakistan or willing to come to the country. The government should also contribute to such a facility.

The fourth area of government involvement would be to work with the members of the Pakistani diasporas to invest in some of the modern services in which they have expertise.

Some of this is being done already but more needs to happen. Their investments could also be covered by the guarantee mechanisms discussed above. The Pakistani community in the US is large and well-resourced. It is also willing to assist the development of their erstwhile homeland if there are available opportunities. This calls for a more active role by Islamabad.

The difficult situation modern services in Pakistan face will not go away on its own.

The government needs to get actively involved to have this part of the economy realise its enormous potential.

[url=http://epaper.dawn.com/ArticleText.aspx?article=25_07_2011_605_003]Another kind of business fear[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Obama’s promised new beginning[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B]By Shahid Javed Burki
Published: July 31, 2011[/B]

In June 2009, less than six months after being sworn in as America’s president, Barack Obama addressed the citizens of the Islamic world. He chose Cairo’s Al Azhar University, the oldest surviving centre of Islamic learning, as the site for his much anticipated address. This was to be one of the most important and remembered speeches the president gave in the early part of his tenure. In it, he promised a new beginning in America’s relations with the world of Islam.

“I have come here to seek a new beginning between the United States and Muslim world, one based upon mutual respect; and one based upon the truth that America and Islam are not exclusive, and need not be in competition,” he told his large audience. “Instead they overlap, and share common principles of justice and progress; tolerance and dignity of all human beings. The people of the world can live together in peace. We know that is a God’s vision. Now that must be our work on Earth.”

President Obama thought that defining a new relationship between Islam and America was expected of him. He was a different kind of American president. “I’m a Christian, but my father came from a Kenyan family that includes generations of Muslims. As a boy I spent several years in Indonesia and heard the azan at the break of dawn and at the fall of dusk. As a young man, I worked in Chicago communities where many found dignity and peace in their Muslim faith.”

That speech was given two years ago. The American president could not have imagined how much would change in the Muslim world since the Cairo address. He must have hoped that democracy, liberty, freedom of expression, respect for the rule of law and rights of all citizens — ideas on which America had built its own society and its own political and social orders — would be adopted by those in the Muslim world where authoritarianism governed. That began to happen in ways that could not have been imagined in June 2009. One single and tragic act of defiance by a frustrated young fruit vendor in a small Tunisian town ignited the Arab world. The Arab street erupted and brought down two long-enduring regimes and threatened several others. The West, including America, surprised by these rapid moving events, stood by and watched as the Arab youth turned out in the streets and in public squares, no longer afraid that they will be mercilessly assaulted by the security forces. They brought down the presidents of Tunisia and Egypt. It was only when the Libyan regime threatened to massacre its own people that the West intervened.

The West began a military operation against the regime of Muammar Qaddafi in Libya that has lasted longer than expected. The Assad family that represents a small non-Sunni minority in a Sunni majority country launched a viscous campaign of repression to beat back those who wanted a more open political system. The opposite happened in Bahrain, where the Sunni establishment and monarch were challenged by the country’s large Shia majority. In Yemen, a society that was still governed by tribalism and tribal loyalties was set on fire, and it rages on even as the country’s long-serving president has gone to Saudi Arabia to recover from the injuries suffered during an attack on his compound by those who had rebelled against his rule. The Arab political revolution is actually work in progress.

There were other developments in the Muslim world. A political party inspired by Islam won the plurality of the vote in a general election and prolonged the rule of the country’s prime minister, Teyyip Erdogan. The Turks demonstrated that Islam was not incompatible with democracy. America and its Nato allies, fearing that they may get stuck in Afghanistan, began the search for a way out of that country that had defied so many other foreign interventions. The Americans found and killed Osama bin Laden in a city deep inside Pakistan’s territory, by carrying out an operation that was deeply resented by many in Pakistan, who considered it an act of aggression committed against a sovereign nation. After relations with Pakistan rapidly deteriorated, Washington indicated that it was holding back part of the aid it had promised the country’s military. A resolution was moved in Congress demanding a cut back in economic aid as well.

The Muslim world’s relations with America, therefore, were moving in directions that were not expected by the country’s new president. To use a favourite Obama expression, it is necessary for Washington to press the reset button. In doing so, it needs to cognise a few things. First, the world of Islam is not homogenous. The people living in these countries belong to many different cultures and have had different histories. They are making economic, political and social progress at different speeds.

Second, the political systems that are evolving in these countries will be different. This is not surprising since the Christian nations in Europe and America don’t have the same political structures. Third, the strategic interests of countries in the Muslim world will not always be the same as that of America and its European allies. To force countries to follow Washington, Berlin, London and Paris is to generate resentment which is not good for any country inside or outside the Muslim world. Let us take three examples.

A more confident Istanbul has begun to carve out a role for itself in the Middle East, Central and South Asia that may not be in line with what the Americans consider to be their interests. An economically weakened and politically unsettled Islamabad is rightly nervous about what might emerge in its neighbourhood after the United States begins to pull out of Afghanistan. Tehran feels anxious because of the fact that it is the only major Shia country in the middle of a Sunni world. It may be inclined to give up its nuclear ambitions if it feels comfortable about its security situation.

In other words, in resetting the button, President Obama needs to move forward from rhetoric to real politics.

Published in The Express Tribune, August 1st, 2011.
[url=http://tribune.com.pk/story/221402/obamas-promised-new-beginning/]Obama[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]America is finding its way in Asia[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 01 Aug, 2011[/B]

FOR Pakistan’s businesses to increase their share in the global market place, they must figure out which destinations should they seek for their exports.
Should they move from the crowded markets in the old world or work to cultivate clients in the more dynamic and more rapidly growing economies in Asia? The right answer to this question will depend to some extent on how Asia is shaped by the rivalry between America and China.

America is trying hard to find its way in a world it no longer dominates. For two decades, from 1991 to 2011, it was the uncontested super power, in command of the global economy and in possession of military might which made it possible to project its power in the world’s four corners.

The space it then occupied was created by the collapse of the Soviet Union and with it that of European Communism. Now, two decades later, it is finding it hard to remain the unchallenged master of the world largely because of the damage that was done to its economy by the Great Recession of 2008-09. The muddled way it had handled the problem of dealing with selfimposed debt ceiling has further alerted the world to the decline in its power. The most significant challenge it now faces is because of the economic rise of Asia.

Washington knows that it has to accommodate Asia and create a world order which would deal with the relative decline in its own economic power along with the rise of the economies of Asia, in particular that of the continent’s two large economies-- China and India. However, it has not yet quite figured out how to manage this transition.

When President Barack Obama visited Asia for the first time in his official capacity, he talked openly and frequently about a world that had two contending economies – that of his own country and China – and offered to create a multi-tiered global system. In it the world would be guided by a G2, America and China, with the G20 countries helping with the more detailed work. The rest of the world would constitute the last step on the ladder.

President Obama’s willingness to make space for China in the new world order did not go well with the more nationalistic elements in his own country. Many in the United States continue to maintain that “American exceptionalism” makes the country unique and also gives it a mission to export its social values to all parts of the world. As such it would be wrong to share its place in the world order with any other nation.

As President Obama settled in his office, he also seemed to change his mind about G2 arrangement. In November 2010, he went on his second visit to Asia, this time stopping in India where he famously declared that India was not a rising economic power but had already risen. He also indicated the US’s support for the Indian effort to get a permanent seat in the United Nations Security Council. Since then America’s relations with India have warmed even more while there has been a cooling-off with Beijing.

Added to this state of flux in America’s attempts to find a new basis of working with Asia is the rapid deterioration of relations between Islamabad and Washington.This then is the context with which we should look at the important speech given by Hillary Clinton in Honk Kong on July 25. This was the last stop in her five-nation visit to the several spots of vital interest to her country.

Mrs Clinton had no problem recognising that Asia’s rise was ushering in a new global economy. “The economic rise of the Asia-Pacific region is an astonishing historic achievement that is reshaping our world today and into the future…the numbers tell a powerful story. Never in history have so many climbed so far, so fast,” she told her Hong Kong audience. Asia’s remarkable performance was good for America, she emphasised.

America has been steadily building its ties with the Asian countries to contribute to Asia’s growth as a major trade and investment partner, a source of innovation that benefits Asia’s companies, a host to 350,000 Asian students every year, a champion of open markets, an advocate of universal human rights, and a guarantor of stability and security across the Asia-Pacific.

But Washington’s approach to Asia would be comprehensive, not focused on one or two countries. In that respect she was walking away from the line taken by her president, Barack Obama, during his first visit to the continent. In the revised American strategy, the approach to Asia would not be focused on China, admittedly the continent’s largest economy and also it’s most dynamic. It will involve all major and minor countries in the area. “The Obama administration has made a comprehensive commitment to reinvigorate our engagement as a Pacific power- shoring up alliances and friendships, strengthening multilateral institutions”.

The secretary of state also strongly indicated that those who in the area were suggesting that Asia now had the strength to go alone without continuing its dependence on the United States were making a mistake. They were misreading the dynamics of the change that was underway in the global economy. She promised that America will remain fully involved in the region.

The country had strong interests in the area. American exports to the Pacific Rim were $320 billion in 2010, supporting 850,000 jobs in the country. “America’s future is linked to the future region. And the reverse is also true as well because the future of Asia-Pacific is linked to America. We are a resident power in Asia – not only as a diplomatic and military power, but a resident economic power. And we are here to stay.

Having laid out the ground for relations between America and the Asian continent, she spent a fair amount of her time in detailing what she considered to be the main policies all countries needed to pursue if they wanted to benefit from the global system. “Last March in APEC meetings in Washington, I laid out four attributes that I believe characterise healthy economic competition. And these are very simple concepts, easy to say, hard to do: open, free transparent, and fair. Fair means sustained faith in the system. That faith is difficult too sustain when countries are forced to trade away their intellectual property just to enter and expand in foreign markets, or when vital supply chains are blocked.” Lest there was any doubt as to the direction in which her finger was pointing, she said: “And a number of nations, wealthy in the aggregate but poor in per capita might even think that rules don’t apply to them.” Mrs Clinton then went on to extol the virtues of rule-enforced multilateral trade. “Enough of the world’s commerce takes place with developing nations that leaving them out of the rule-based system would render the system unworkable.” Mrs Clinton’s Hong Kong address presented a kind of Monroe Doctrine for Asia – perhaps it will come to be called the Obama doctrine. While President Monroe had declared Latin America to be the exclusive area of influence for the United States, warning off other rich countries from the area, the Clinton speech warned China not to pursue interests in the region in her immediate neighbourhood by attempting to exclude the US. The meaning for Pakistan was clear. Its attempt to use China to balance the economic pressure that the US had begun to work on the country will not work under the Obama doctrine since all the major Asia-Pacific power will be required to pursue their common interests in a framework where rules hold sway.

[url=http://epaper.dawn.com/ArticleText.aspx?article=01_08_2011_605_005]America is finding its way in Asia[/url]

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

[B]By Shahid Javed Burki
Published: August 7, 2011[/B]

While politics and political science are not my fields, I have always maintained that it is difficult to understand economic history without bringing them in as explanatory factors. Without an appreciation of the environment in which policymaking is carried out, it is hard to fully understand why those in power do what they do. Why did Governor Shahid Kardar of the State Bank of Pakistan resign after being in office for only a few months? Why, after the governor’s departure, did the central bank decide to lower the rate of interest when Pakistan has the second highest rate of inflation in Asia?

Economic theory and practice would have suggested a tightening of money supply, not its easing. This was not expected by a dozen or so senior economists, who, when they were questioned before the Bank’s credit committee met, predicted that either the policy won’t change or there may be a slight rise in the rate. The bank’s action confounded economists and further eroded the confidence of those watching economic developments on the seriousness of policymakers with regard to addressing the grim economic situation the country currently faces.

The answers to these questions are not to be found in economics but in politics. As democracy continues to take hold in the country, policymakers are working to ensure their survival by not keeping the men in uniform satisfied with their performance. This is what happened when a series of prime ministers were sent home by the powerful military for having failed to provide good economic management. Their removal was in fact demanded by senior politicians who occupied the opposition benches in the legislature. And when the military intervened, even the press welcomed their arrival. There are no calls this time around for history to repeat itself. The reason is that political forces are looking at some of the developments outside the country’s borders and drawing important lessons for shaping their own actions. Three of these developments are particularly important. Two of these occurred — or, more accurately are still occurring — in the Arab world, while the third took place in Turkey.

The first of these is the effective use by the youth in the Arab world of new media to get organised and challenge the established political order. They used such new instruments of communication as Facebook and Twitter and such devices as the iPad and mobile telephones to gather and demonstrate on the streets. This expression of discontent didn’t need political organisations for mobilisation. The strength of this uprising was drawn from the depth of despair that had built up over years and decades. The authoritarian regimes in Tunisia and Egypt were not able to use their well-developed security forces to keep themselves in power. Once the military establishment in these two countries indicated that it would not intervene to keep in place the discredited leaders, regime change became inevitable. Yemen, Libya and Syria have not gone the way of Tunisia and Egypt for the reason that those in power have managed to stay there by exploiting the social, cultural and religious divisions in their societies. They may have bought some time for themselves but not longevity.

The second lesson is that the ‘political street’ has been inserted as another balancing factor in the evolving political systems. If there is general dissatisfaction with the way the executive branch is acting and its actions cannot be constrained or controlled by the legislature and the judiciary, the street will be prepared to act. The street is not just in the Arab world but in all parts of the Muslim world. It is ready to throb with activity because of the age of the population. The median age of the populations in Muslim countries is much lower than in other parts of the world. It is only 21 years in Pakistan, which means that some 90 million people in a population of 180 million are below that age. Most of them are not active participants in the established political order. They are deeply concerned about their present economic situation and future prospects and could come out on the streets if they lose hope in their future.

The third important development of note is the sudden departure of all senior military commanders in Turkey. As Anthony Shadid, the Pulitzer Prize-winning journalist, wrote recently in The New York Times, “50 years ago, when a populist prime minister tangled with the Turkish military, he ended up on the gallows, the mandate of three election victories little consolation. This time around, the rivalry climaxed with most of Turkey’s military high command resigning simultaneously, its leader complaining of powerlessness and bad press.” There is a consensus among analysts that this action by the commanders has strengthened the position of Recep Tayyip Erdogan, the thrice elected prime minister, rather than weakened it. The once powerful militaries in the Muslim world have had to recognise that the people of their countries want representative political orders in place rather than rule by strongmen.

The main lesson Pakistan’s political establishment has drawn from these developments is that it cannot simply rely on the support of its traditional constituencies. It has to keep an eye on the way people are reacting to their policies. The street also matters. The politicians have also gained some confidence that the military, while still influential in several aspects of policymaking, is not likely to directly intervene. These are reasonable responses to the important developments outside the country’s orders but they have not resulted in good economic policymaking.

One important illustration is the way Islamabad is dealing with the State Bank and the way it is using the monetary policy to keep the street on its side. Most political mistakes are made by sacrificing the future to the present. It is quite clear that the current rulers are getting ready for the next general elections. They have to be held in the next 20 months. If held under the current political dispensation, this would be the first time that an elected government would have completed its full term. To get to that point, the PPP-led government seems to have concluded that it is important to bring growth back by easing money supply and that tightening of money would reduce investment by the private sector and thus slow down the increase in employment. These are short-term responses to a difficult economic situation but their consequences will, in the long run, be politically and economically grim.

Published in The Express Tribune, August 8th, 2011
[url=http://tribune.com.pk/story/226157/economics-and-political-evolution/]Economics and political evolution – The Express Tribune[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The ‘troubling cut in discount rate’[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 08 Aug, 2011[/B]

THE recent move by the State Bank of Pakistan to ease money supply by lowering the discount rate is troubling. The motivation for lowering the discount rate was political. The decision was not taken for economic reasons.

The lesson being drawn from the Arab Spring by Pakistan’s old as well as new political establishment is that the “street” has been inserted as another balancing factor in the evolving democratic systems. If there is general dissatisfaction with the way the executive branch is acting and its actions cannot be constrained or controlled by the legislature and the judiciary, the street will be prepared to act.

The street in not just in the Arab world but is in all parts of the Muslim world. It is able to throb with activity because of the age of the population. The median age of the populations in Muslim countries is much lower than in other parts of the world. It is only 21 years in Pakistan which means that some 80 million people in a population of 180 million are below that age.

Most of them are not active participants in the established political order. They are, however, deeply concerned about their present economic situation and future prospects. They will become politically active if the state of the economy continues to follow its present trend and does not promise them a better future.

Adopting a responsible fiscal stance has proved to be extraordinarily difficult for the democratic government in Pakistan. It understands that the deficits that the government is currently running are unsustainable. And yet it has shown carelessness in terms of controlling current expenditures or disciplining big loss-making enterprises. Senior public officials continue to spend government money on themselves or on the activities that don’t have a positive impact on the economy. Public corporations such as PIA, the railways and the Wapda continue to run heavy losses.

An important lesson Pakistan’s political establishment has drawn from the Arab Spring is that it cannot simply rely on the support of its traditional constituencies. They have to keep an eye on the way people are reacting to their policies. The street also matters. They also seem to have gained some confidence that the military, while still influential in several aspects of policymaking, is not likely to directly intervene. These are reasonable responses to the important developments outside the country’s borders but they have not resulted in good economic policy making. One important illustration is the way Islamabad is dealing with the State Bank and the way it is using the monetary policy to keep the street on its side.

However, the government by leaning on the central bank to adopt an accommodating monetary policy has created a delicate economic situation. It will adversely affect the long-term health of the economy. On 30 July, Acting State Bank Governor Yaseen Enver announced that the discount rate was being brought down from 14 to 13.5 per cent.

The acting head took a position different from the one adopted publicly by Shahid Kardar.The former governor had openly expressed a deep concern for resort by Islamabad to the printing press for financing large fiscal deficits.

His successor adopted a different policy stance. “The key parameter in this assessment is the out look for inflation which in FY 2012 is expected to remain in line with the announced target. The SBP’s forecast for inflation ranges between 11-12 per cent”, he told the press in a meeting following the announced cut.

Most political mistakes are made by sacrificing the future to the present. It is quite clear that the current rulers are getting ready for the next general elections. They have to be held in the next 20 months. If held under the current political dispensation this would be the first time in the country that an elected government would have completed its full term.

To get to that point the PPP-led government seems to have concluded that it is important to bring growth back by easing money supply and that tightening of money would reduce investment by the private sector and thus slow down the rate of increase in employment.These are short-term responses to a difficult economic situation but their consequences will, in the long run, be politically and economically grim.

If the economy was growing at a rate of 6-7 per cent a year, it will be performing as well as Bangladesh of today while still lower by a couple of points from India’s current rate of GDP increase. Instead the rate of GDP growth in 2010-11 was only two per cent and, even for those who are optimists, the rate in 2011-12 will not be higher than three per cent.This means that the economy is performing well below its potential by as much as 4-5 per cent a year.

I pointed this out to President Asif Ali Zardari in a meeting in his office a few months ago. He said that that was an unfair comparison – comparing apples with oranges. “The Indians have had democracy ever since they became independent; Bangladesh also has had years of democratic rule. Pakistan was governed by military dictators for a good part of its history. Democracy returned to the country less than three years ago. Without democracy you cannot have sustained economic growth”, he explained.

Has the return to democracy been good for economic development? As indicated above, the economy is performing considerably below the rates of growth being achieved by other countries of mainland South Asia. Some of this poor performance can be blamed on factors beyond the control of policymakers in Islamabad. The Great Flood of 2010 shaved off at least one percentage point from the rate of growth, at least for a year, possibly even two.

Terrorist activities which have taken such a heavy human toll and are exacting a significant economic price cannot be blamed on government policies. It is the consequence of geo-politics with Pakistan a largely passive player. The Lahore based Institute of Public Policy estimated in its 2009 annual report that persistent terrorism was costing the economy in a number of different ways. “These costs (direct and indirect) aggregated to Rs678 billion (approximately $8.4 billion) in 2008-09, equivalent to five per cent of the projected GDP.” Some of this could have been contained and, therefore, reduced by the adoption of the right sets of policies.

It would not be an exaggeration to suggest that poor policies are costing the economy at least 2-3 per cent in lost growth every year. If this trend continues poor policy performance would have cost the economy 16 per cent of the gross domestic output in the five year period between 2008 and 2013.

The failure of the policymakers stretches over a number of fronts. At least six of these matter a great deal: absence of a clear leadership in economic matters, absence of strategic thinking concerning the revival of the economy and bringing growth back, absence of clear division of authority between the central government and the provinces, absence of fiscal discipline, reliance on central bank finance to meet government’s fiscal deficits, and lack of attention to increasing Pakistan’s share in the global markets. Most of these failures can be lumped together under the heading of poor economic governance.

[B][U][CENTER][SIZE="5"]Exploding Karachi[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: August 15, 2011[/B]

Will Pakistan soon recover — or recover at all — from the deep malaise that currently inflicts it? There are a number of things that are hurting the country. Some of them are understood, such as the troubles on the economic front. Economists know what the solutions are to get the country to walk back from the edge of the abyss. The real problem is that the political establishment does not have the will to do what needs to be done. Then there is the problem created by unsettled politics. In a way, this is healthy for the development of the political system. The country is learning to find solutions through discourse and accommodation rather than letting the military put its heavy hand on politics.

It is the third problem — that of resort to violence to gain ground against opponents — that poses the most serious challenge to the country. Pakistan cannot make progress unless different kinds of violence that have become routine are brought under control. It is because of this that the World Bank in its 2011 World Development Report has included Pakistan, along with a score of other countries, in its list of fragile states. In fact, there are three ongoing wars in Pakistan. There is no end in sight for any of them: they are the wars in Karachi, the war among the various sects of Islam, and the war between the state and various extremist groups. It is the explosion in Karachi with which I will deal today.

The ethnic war in Karachi started a couple of decades back but subsided in intensity for a while. Its main cause is the inability of its very diverse population to further their interests without hurting those of the rest. The city has grown fifty-fold since the country gained independence 64 years ago. Had Karachi grown by the natural increase in population — in Pakistan’s case by 2.85 per cent a year — it would have doubled in size about every 25 years. Had it grown at a rate normal for large urban centers — about five per cent a year — its population would have doubled every 14 years. In the latter case, the city’s population would be around nine million, less than half its present size. Instead, the city’s population has increased by six per cent a year.

What caused the explosion in Karachi’s population are three waves of migration that brought three very different people in search of jobs and, ironically, security. In other words, if Karachi today has a population of 20 million, slightly more than a third of it is made of the Muhajir community, about a fourth of the original Sindhi-Makrani population, about a fourth also the of the Pashtun and the remaining one-sixth of other ethnic groups. There are supposedly one million people from Bihar and Bangladesh who reside in the city.

This ethnic brew continues to churn and produce violence. The several communities that make up the city’s population have not found a way of developing an institutional response to resolving their differences.

Research suggests that rapid urban growth is associated with weakened social cohesions and increased risk of violence. Karachi, as discussed above, increased in size at a rate much more than that of other megacities in the world. But despite its explosive growth, the city had one advantage: rough balance in the numbers of people belonging to different ethnic and social groups. This should have led to politics and economics of inclusion rather than that of exclusion. That happened for a while when the Muhajir community gained political control of the city. Its leaders worked to develop not only the areas populated by their community but those of other ethnic groups as well. However, that balance was disturbed by the escalation of violence in the Pashtun areas of Pakistan and Afghanistan. This generated another wave of migration which has brought in more people from this ethnic group. They are now trying to find economic and political space for themselves in the city and that has led to violence once again. The solution is not the use of force; it has to be economic and political accommodation of the people who feel excluded.

[B]Source: [URL="http://tribune.com.pk/story/231326/exploding-karachi/"]Exploding Karachi[/URL][/B]

[B][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Time to boost trade with India[/FONT][/SIZE][/COLOR][/CENTER][/B]

[B]By Shahid Javed Burki
Monday, 15 Aug, 2011[/B]

SINCE its independence, Pakistan has developed new markets for its products, mostly at distant places. First Japan and then the United States became important markets for it while the commercial exchanges with India became insignificant.

This development went against what economist call the “gravity model of trade”. It means the largest trading partners should be those that are relatively close and have large markets.

According to the model, China and India should be Pakistan’s largest importers and exporters not the US and the European Union. The potential of Pakistan-China trade may be realised as a consequence of what the two countries call an “all-weather friendship”. The heavy burden of history, however, continues to weigh on the development of trading relations between Pakistan and India.

If trade was to resume without constraints, gains to Pakistan would be higher than those for India. There would be large returns for Pakistan, if transit trade between India and Afghanistan and points beyond was to be allowed. In other words, the push for removing trade barriers that continue to inhibit the movements of goods and services between the two countries should come from Pakistan.

Islamabad should continue to press for Indian cooperation in this area even if New Delhi drags its feet as it is likely to do once the conversation on trade begins in earnest. We know from the experiences of other countries that the Indian bureaucracy is extremely rigid and conservative in matters of trade.

It is a good indication of the current Indian mood that on August 5, Anand Sharma, the country’s commerce minister, invited his Pakistani counterpart, Makhdoom Amin Fahim, to visit New Delhi for discussions on trade matters. There are indications that these talks will focus on half a dozen issues.The first of these is the grant of the “most favoured nation” status by Pakistan to India. Pakistan is obliged to do that under the World Trade Organisation’s rules for its members. Its reluctance to fulfill this obligation is hard to understand.

But a lot of water has flowed under many bridges over time and public opin ion has certainly softened in Pakistan about its relations with India. Pakistan’s business community also wants trade to be conducted with India without too many constraints. It rightly views the many advantages of being able to reach the vast Indian market — a market that is rapidly increasing in size. .

What are the issues that Pakistan should raise with India? Islamabad should focus on at least three.The first of these are non-tariff barriers that India uses not only against Pakistan but against most other countries. Some of these are allowed under the WTO rules. India has been one of the more aggressive countries to make use of the antidumping provisions of the WTO. These may be used in case Pakistan’s exports to India increase rapidly.

The second issue is cross-border land trade. As trade economists point out, trade facilitation is the best way to promote commerce. All of South Asia followed the import substitution approach to economic development for about 40 years after the British left the subcontinent. Tariffs were kept very high to encourage domestic production.

However, that began to change in the early 1990s as all South Asian countries began to lower their tariff walls. As Gary Pursell, a well regarded trade economist, points out in a recent article, “during the 1997/7 to 2002/3 trade liberalisation period, Pakistan’s tariffs were gradually reduced: the average came down from 42 to 17.3 per cent”. Indian tariffs went in the same direction but from a higher level compared to Pakistan to a level much lower. In India’s case, the decline was from 89.6 per cent in 1982/83 to only 9.8 per cent in 2007/08.With low tariffs there will not be much benefit if they are further reduced as is the aim of the South Asia Free Trade Area agreement (Safta).

Since the trend began towards lowering tariff barriers there is much to be gained by easing the restrictions the countries impose on their borders. The drama that takes place on the Wagah border with India is well-known. But this is not restricted to the “lowering of the flags” ceremony that is conducted each evening by the two sides. There is also drama when the goods that flow from one country to the other are moved from the trucks that have brought them to the border to the trucks that will take them to the other side. Each country should allow trucks from the other side to transport the goods to their intended destinations. This will save both money and time: the latter is important for perishable commodities for which there is considerable scope for a profitable exchange for both countries.

The third issue concerns the revitalisation of Safta. This was negotiated in January 2004 at a summit of the countries belonging to the South Asian Association for Regional Cooperation(Saarc). It became effective in July 2006. However, both India and Pakistan have shown considerable lack of enthusiasm for the agreement. India would rather focus on what it calls its “looking east” approach to developing trade relations. New Delhi seems more interested in working with the ASEAN countries. It is assigning a relatively low priority to cementing strong economic relations with the countries in its immediate neighbourhood.

Pakistan’s policymakers have been too distracted by other matters to pay much attention to Safta. This is unfortunate. There is enough empirical evidence available from other parts of the world — from Europe and Latin America, for instance — to suggest that regional associations are a good way of developing trade among the countries that have long been rivals.

[url=http://epaper.dawn.com/ArticleText.aspx?article=15_08_2011_605_004]Time to boost trade with India[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Water scarcity and pricing[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 22 Aug, 2011[/B]

PAKISTAN is one of the world’s most arid countries with an annual rainfall of less than 240 mm. At the same time agriculture is an important part of the economy, accounting in 2010 for over one-fifth of the gross domestic product.

Since the time of the British who invested heavily in tapping the Indus River system for irrigating the virgin lands of the Punjab and Sindh, agriculture has become an important part of the sector.

Over 80 per cent of the cropland is irrigated. Most of the important crops — wheat, rice, cotton and sugar cane — rely on surface irrigation. As discussed below some of these would not be part of the farming pattern if water was properly priced.

According to one expert, until relatively recently, “agriculture was characterised by low cropping intensity and production dominated by low-water requirement crops like food grain. During the last decade, however, the pressure on water has drastically increased with more competition for quantity and quality of irrigation water within the sector.” There is a move towards the production of high-value crops which produce more jobs per unit of water and per unit of land than traditional crops.

Pakistan has been unable to develop the capacity for storing water largely for political reasons. According to a 2009 report by the World Bank, the United States and Australia have over 5000 cubic meters of storage, while China has 2000 cubic me ters. Pakistan’s capacity is only 150 cubic meters.

Inefficient use of water that flows into the vast irrigation system that has been developed over time is another problem the country has to deal with. Of the water diverted from the river system, 96 per cent is used for agriculture while four per cent is consumed by industry and households. However, a significant part of the water that flows into the irrigation system is wasted because of its antiquated design and poor maintenance and poorly leveled fields.

More than 50 per cent of the water in the system is lost by way of evaporation or seepage into the ground. The water that seeps into the ground is recovered by half a million tube wells that have been installed over the last 50 years. Ground water pumping has increased from 3.34 MAF n 1959 to 55 MAF in 2009.Tapping of this resource is done without regulation. The result is that there is “mining” of water with the amount extracted exceeding the amount of natural recharge. About 70 per cent of the working tube wells are producing hard or brackish water which is exacerbating the salinity problem.

Climate change is also affecting Pakistan’s water situation. Glacier retreat is likely to reach 40 to 50 per cent of the area currently under ice cover and as the Pakistani rivers receive most of their flow from melting ice. This will have serious consequences for the availability of water. As the World Bank stated in a major report on Pakistan’s water resources, “while the science is still in its infancy, best estimates are that there will be 50 years of glacial retreat, during which time river flows will increase.

This — especially in combination with predicted more flashier rainfall — is likely to exacerbate already serious problems of flooding and draining, especially in the lower parts of the basin in the next few decades. But then the glacial reservoirs will be empty, and there are likely to be dramatic decreases in river flows, conceivably by terrifying 30-40 per cent in the Indus basin.” Some of the problems that are taking the country towards water scarcity can be resolved by adoption of appropriate public policies. But this, as in so many other cases, will need the exercise of political will. The level of resources needed for development — building of new storage dams and improving the system of irrigation — will have to be increased. This will require a greater fiscal mobilisation effort which means plugging of loopholes in tax structure, widening the tax base and improving the efficiency of the tax collection machinery.

With increased resources, the country will be able to commit more funds for further developing its already impressive irrigation infrastructure. Country’s political masters must gather the will to convince those who oppose the construction of such large dams as the one at Kalabagh that this type of investment is not a zero-sum game where one party’s loss is equal to other party’s gain. A well integrated system for managing the flow in the rivers will benefit all citizens.

Water pricing is another critical public policy issue that needs to be addressed in order to improve utilisation of this precious but declining resource. Pakistani farmers don’t pay the price for water that appropriately reflects the present and future scarcity value of this commodity. Charging the users on the basis of scarcity would improve the efficiency of water use in many ways. Farmers will have an incentive to level their fields to minimise the waste of water. They will also move away from cultivating such water-intensive crops as sugar cane.

Correct pricing of water for non-agricultural use is also important since both industry and households will have the incentives to minimise waste. It has been found that where water is correctly priced there is greater recycling. Israel is one of the countries that has learnt to use water with great efficiency. It is the world’s leader in developing drip irrigation.

Pakistan has paid no attention to developing a regulatory system that would watch over the use of water. For instance, the use of ground water for irrigation, manufacturing and domestic use is hardly regulated. The result is mining of water which is causing a sharp drop of the water table in many areas. To prevent the further deterioration of the situation, the policymakers need to work not only on installing the right price regime but also supporting it with a regulatory system.

Water is one of the important inputs that are now under stress because of underinvestment by the public sector. In the earlier decades, the share of water in the public sector development programme was 20 per cent of the total. In the 1990s it declined by nearly one-half, to only 11 per cent. This means that there was significant reduction in potential increase in GDP because of the lack of sufficient investment in improving the availability and flow of water for agriculture. The elasticity of agriculture growth to water is 0.48. Dealing appropriately with the problem of water scarcity is on important way for bringing health back to a sick economy.

[url=http://epaper.dawn.com/ArticleText.aspx?article=22_08_2011_606_004]Water scarcity and[/url]

[B][U][CENTER][SIZE="5"]Preparing the population for a modern economy[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: August 23, 2011[/B]

For a country that now has the reputation of neglecting the development of its vast human resource, it is possible to reach a somewhat different conclusion about the preparedness of the workforce. When the data for the schooling of the young is examined in some detail, and in the context of what is occurring in other countries of South Asia, Pakistan seems well positioned to develop a modern economy. The data used here are from the work done by the economists Robert Baro and Jhong-Wha Lee at Harvard University. Looking at this data, it appears that compared to other large countries of South Asia, Pakistan is doing better in an area that could be tremendously important for its economic and social future.

In 2010, India had 67 per cent of the 15-plus age group in school while Pakistan had 62 per cent. However, it is at the other end of the educational spectrum — what educationists call the tertiary stage — that Pakistan seems to be doing considerably better than other South Asian countries.

In 1950, for India and Pakistan, the proportion of people attending tertiary institutions was 0.6 per cent. Since this has increased to 5.8 per cent for India, a ten-fold increase, and to 5.5 per cent for Pakistan, a nine-fold growth. For Bangladesh, the increase was spectacular, a twenty-fold growth. However, it is the impressive increase for Pakistan that provides the element of surprise.

Pakistan does well in one critical area — the drop-out rate in tertiary education. Those who complete tertiary education in Pakistan account for a larger proportion of persons who enter school at this level. The proportion is much higher for girls, another surprising finding for Pakistan.

With a considerably lower drop-out rate at the tertiary level, it is not surprising that the number of years students spend in school in Pakistan (5.6 years) is higher than that in India (5.1 years) but a bit lower than that for Bangladesh ( 5.8 years). For tertiary education alone, Pakistan’s youth spend more time being educated than those in Bangladesh and India.

It is in the last two decades that the real brake occurred in Pakistan. The proportion of the 15-plus age group receiving tertiary education in Pakistan increased from only 2.4 per cent in 1990 to 5.5 per cent in 2010. The proportion of students completing tertiary education in Pakistan is 41 per cent higher than that for India. Better performance, when measured in terms of the proportion of the population receiving tertiary education, matters a great deal for the economic future. As Baro and Lee point out, the estimated rate of return is very high for tertiary education, close to 18 per cent. This is only 10 per cent for secondary education and almost zero for primary education. The state, by only concentrating on primary education, is not buying a better future for the citizenry. It must make it possible to develop tertiary education as well.

The answer to the question — why has Pakistan done so much better than other large South Asian countries? — leads us into the realm of speculation. An argument can be made that the nationalisation of privately-managed education in the 1970s and the resulting expansion in the role of public education resulted in a serious deterioration of educational standards. This troubled the well-to-do segments of the population who had the means to pay for good education if it could be provided. This brought the private sector into education and its role expanded rapidly.

The demographic changes occurring in the West and the pressure on the state to pull back from such activities as education, research and innovation means that enormous opportunities are being created for the populous countries of South Asia. In light of the little noticed progress it has made in tertiary education, Pakistan seems well positioned to take advantage of the opportunities becoming available in the new economy.

[B]Source: [URL="http://tribune.com.pk/story/236961/preparing-the-population-for-a-modern-economy/"]Preparing the Population[/URL][/B]

A tripartite arrangement
 

[B][U][CENTER][SIZE="5"]A tripartite arrangement[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: August 29, 2011[/B]

The West’s turn away from letting the state play an important role in shaping the structure of its economy and society will have important consequences for the entire world. Some of these will be negative, some positive. They will be positive, at least for those countries whose leaders are able to look into the future, not only to meet the challenges it will bring but also make use of the opportunities that may be on offer.

Some of the public policy choices should be made in the context of the three large countries of mainland Asia — China, India and Pakistan. They will have to be tailored to meet their own needs and circumstances. China will need to work out how it will continue to make the transition to an open market while continuing to limit the openness of the political system. It will also have to determine the role it will have to play in shaping the global economy, now that it has become the worlds’ second largest economy and may, by 2015, overtake the United States.

India, after a remarkable two-decade long record of uninterrupted high rate of economic growth is losing some of the momentum it had picked up in this period. Large segments of its population remain unaffected by the economy’s rapid growth. In the middle of 2011, the country was convulsed by the popular reaction to several incidents of large-scale corruption on the part of senior elected officials and by the officers of the military. Being a vibrant democracy it will have to find a way out of the resentment that has built up within a short period of time.

Pakistan, the third country in this group has the weakest economy, a highly troubled society and an unsettled political system. Some have said — including Hillary Clinton, the United States Secretary of State — that the country is faced with an existential threat. The World Bank’s 2011 World Development Report includes the country among what it regards as fragile states. It is in the strategic interest of its two very large neighbours — China and India — to ensure that the country does not stumble so badly that it succumbs to the eventual control by the extremist forces that are operating in the country. A fracturing — even a greatly unstable — Pakistan will not be good for its neighbourhood, certainly not for China and India.

Some of the responses by the mainland Asia to the developing situation in the West will, and should, take the form of bilateral relationships — Pakistan working with China, China working with India and India working with Pakistan. Some of this is happening. Snubbed by the United States, Pakistan has turned to China for economic assistance, military support and simply for some encouragement in what Islamabad considers to be a very ‘unfriendly world’. The two countries have developed what both call an “all weather friendship”. While Beijing is reluctant to get very involved in Pakistan’s growing rift with the United States, it is prepared to give signals to the world that it supports Islamabad in many different ways.

While both Beijing and New Delhi continue to watch each other with some suspicion; while India remains disturbed that China continues to hold some of the territories it considers its own and has not withdrawn its claim to the Indian state of Arunchal Pradesh; and while Beijing is unhappy that New Delhi has given refuge to Dalai Lama from where he continues to operate, the two countries have learnt to work with one another. This is particularly the case in bilateral trade which has grown rapidly and now amounts to over $40 billion.

Notwithstanding these bilateral responses by the three countries to the enormous changes in the global economy, there is also some space for the three countries to work together. Not only do they account for 40 per cent of the world’s population, they also cover a good part of the world’s total area. This trilateral relationship will have to develop institutional underpinnings in addition to the improvements in the trade and communication links that already exist.

[B]Source: [URL="http://tribune.com.pk/story/241151/a-tripartite-arrangement/"]A Tripartite Arrangement[/URL][/B]

The state in South Asia
 

[B][U][CENTER][SIZE="5"]The state in South Asia[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: September 5, 2011[/B]

There are many political forces in the West — mostly in the Anglo-Saxon world — that are posing serious questions about the role of the state. How big should it be; what should be its functions; how much space should it surrender to the private sector? Should some of the functions the federal government in the United States has acquired be the responsibility of the state governments? Did the American founders, while writing the constitution of the country, wish to keep the government close to the people? If that is the case, shouldn’t the federal government step back and allow the states to perform the functions that are legitimately and constitutionally theirs?

Similar questions are being asked in Britain but in a somewhat abstract form in the absence of a written constitution. In light of all this, there is a serious effort in many parts of the West to push the state back from some of the space it now occupies. If that were to happen — and there is a strong probability that it will — this new and considerably limited role of the state in many western societies will create opportunities for the populous countries of South Asia if the countries in the region work together and come up with a new strategy of growth. This is where demography enters the picture.

There is a profound asymmetry in the way demographic situations are developing in the West and in the populous countries of South Asia. The rate of human fertility has declined sharply in most countries in the West. The result of this is that a number of countries are now seeing the size of their populations declining while those in South Asia will continue to increase for several decades. The South Asian populations will remain young for several more decades while those in the West will age rapidly. The demographic change in the West will have two consequences. One, it will not have young people in the number needed by the economies where knowledge rather than material inputs are the main contributors to growth. In most western countries, the structure of the economy is dominated by the service sector and within the service sector by knowledge intensive activities. This means that the workforce needed for these types of economies must be very well-trained in modern skills. This also means that the state and the companies must invest large amounts in research development. Some of the major developments of the last few decades, including the development of the internet, became possible with the heavy involvement of the state.

Government support for research, development and skill development would be placed in jeopardy if political forces such as the Tea Party Movement in the United Sates carry the day. This would seriously compromise the ability of the United States and other western countries to deliver the services and products the citizens of these countries need and will demand. This is where the populous countries of South Asia enter the picture. If they can organise their own governments to produce the manpower needed by the new economies, they should be able to fill the gap and become major suppliers to the West. However, before they are able to do this, they will need to have an effective state that can prepare the citizenry to take up this challenge and realise its opportunity. Unfortunately, most South Asian states, for several different reasons, are seeing the weakening of the state.

There is now palpable unhappiness on the part of the citizenry in Bangladesh, India and Pakistan with the working of the state. In Bangladesh, the state has been weakened by the enormous rivalry between two political groups that have been fighting it out to control the state. In India, there is popular disgust at the incidents of major corruption committed by senior public officials, both elected and non-elected. In Pakistan, the civilian government has not proved equal to the task of handling the various problems the country faces.

The obvious conclusion to be drawn from this is that while the West is presenting an extraordinary opportunity to turn South Asia’s young populations into enormous economic assets, the South Asian states themselves will have to improve their performance. Those who are weak states will not be up to the challenge.

[B]Source: [URL="http://tribune.com.pk/story/244712/the-state-in-south-asia/"]State in South Asia[/URL][/B]

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

[B]By Shahid Javed Burki
Monday, 05 Sep, 2011[/B]


TODAY, more than three years into the rule by the current government, the Pakistani economy is beset by a number of shortages. All of them are critical. Without concerted effort to overcome them, they will do a huge amount of damage to the economy.
Pakistan can be appropriately described as a “shortage economy”. It is short of its own saving to promote development. That makes the country dependent on external capital flows which tend to limit the freedom of manoeuvre in the field of international politics.

It is short of a skilled workforce because of the poor quality of its educational system, particularly in the public sector. This means that the country is not able to take full advantage of its large and young population. It is getting close to being classified as a “water stressed” country with projected sharp declines in the amount of water that flows through its rivers. This will be the consequence of climate change which, according to a World Bank report, will melt a significant amount of its glacial cover.

It has had to deal with serious shortages of electricity which has resulted in great deal of discomfort for all but particularly those who don’t have the resources to generate their own supply of power. And, it is now faced with a growing shortage of natural gas – a natural resource in which the country once had a large surplus.

What is common with all these shortages is the failure of public policy not just by the government that currently holds the reins of power. This failure has been a constant in the story of Pakistan’s economic development. In the case of each of these five shortages – domestic finance, trained and educated workforce, water, electricity and natural gas – the various administrations that have been in charge failed to address the posed problem from strategic perspectives.

The history is punctuated with ad hoc policy responses. Policymaking was motivated by “short-termism”. This “patchwork” approach to policymaking has had a profound negative impact on the performance of the economy.

The country will continue to under-perform and fail to realise its full potential unless the policymakers adopt a strategic approach. What is required is the right of kind of institutional mechanism that functions for each of these shortages within a consistent and coherent policy framework.

Natural gas is one of the critical inputs that is now in short supply. In recent years there has been a sharp increase in its demand. The increase in the demand is largely the consequence of the price regime the government had adopted for the use of this important resource. The price charged from various users did not reflect is re al cost in the international market which should have been done in terms of oil equivalence.

The price instead was determined by the cost of bringing the gas out of the ground and sending it through pipelines over long distances. The result was that it was under-priced with reference to all other fuels. There was a big switching to gas from other fuels. Industrial users and power producers shifted from oil to natural gas; households moved from its use to coal and wood.The substitution of gas from wood was benefi cial since it slowed down deforestation in the country which has been going on at an alarming rate.

It was with the discovery of the gas field at Sui, Balochistan in 1952 that Pakistan entered the field of major suppliers. Pakistan with estimated reserves of 849 billion cubic meters (bcm) is the 28th largest gas reserve country.

India with over 1.05 trillion bcm is just above Pakistan. It is in the 25th position. Bangladesh with 195 bcm is the 45th the largest producer.The largest producers, of course, are Russia (47.5 tcm), Iran (29.6 tcm), Qatar (25.4 tcm), Turkmenistan (7.5 tcm), Saudi Arabia (6.1 tcm) and Nigeria (5.2 tcm). Interestingly four of the five largest producers of gas are Muslim countries. In spite of its rapid depletion, Sui remains the largest field in Pakistan with reserves of 20 bcm or about onefourth of the total for the country. Put into operation in 1955, it supplies 26 per cent of Pakistan’s total daily consumption. Other large fields in the country are at Qadirabad, Sawan, and Kadanwari, all in Sindh. The northern areas of Punjab have a combined oil and gas field at Toot.

The consumption of gas has been increasing at the annual rate of seven per cent over the last four decades. However, demand has increased at a higher rate, 7.5 per cent in the past decade compared to 4.9 and 5.9 per cent respectively in the 1980s and 1900s.

This increase is largely the result of greater gas consumption by electric power plants. According to one estimate the overall income elasticity for gas demand is high, at 0.86 while the price elasticity is low, at 0.05. Given these elasticities, the demand for gas is likely to increase at a rate of 5.5 to 6.0 per cent year.

“The gap in demand and supply is likely to increase by 342 mmcft by 2014-15 if the supply increases at an annual rate of one per cent. If, on the other hand, there is no increase in supply, the gap will increase to 408 mmcft over the next five years.

The cost to the economy of this shortfall could be as high as Rs110 billion, or 076 per cent of the gross domestic product. There are several reasons why such a severe shortage of gas has appeared. Exploration has not attracted much foreign capital largely because of political uncertainty and the fact that potential exists in the parts of the country where security is a problem.

The large but now depleted gas reserves at Sui in Baluchistan need deeper drilling for which both foreign capital and expertise are needed. According to the IPP’s 2010 report, “16 gas fields having estimated reserves of 2tcf are lying dormant.” Both internal exploration – including in the sea – as well as connecting the country with some very large producers outside the borders should help in resolving the supply problem. Two international pipelines are being planned; one to connect Pakistan with Iran, the other to link the country with Turkmenistan.

The first was initially planned as a three country link, Iran, Pakistan and India. However, it ran into problems; pricing issues including payments to Iran as well as the payment of transit fee by India to Pakistan. The other problem was the imposition of economic sanctions by the United States on Iran that has kept large American companies out of the project.

Generally, Washington does not favour countries it considers its friends to deal with Iran for promoting large commercial ventures. The IPI pipeline falls in this category. Now that New Delhi has close relations with Washington, it has decided to opt out of this project. Pakistan, on the other hand, with difficult relations with the United States, is pressing ahead with it.

Tackling the various shortages should, therefore, be a high priority for the government. The price for not moving expeditiously will be very high; it will be paid in terms of the continuation of the slow rate of economic growth, increase in unemployment and hence in poverty, and of further marginalisation in the global economy.

[B][U][CENTER][SIZE="5"]Good governance issues in South Asia[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: September 12, 2011[/B]

The pressure by the citizenry in two South Asian states to improve the quality of governance is taking two different forms. There are different reasons for popular discontent. In India, the problem lies in the way the fruits of extraordinary economic growth have been distributed among different segments of the large Indian society. Some people and regions have benefitted more than others. Some 50 years ago, political economists began to warn countries in the developing world, that were beginning the process of ‘planned development’, that high rates of growth can — in fact often do — produce societal tensions that cannot be absorbed by weak political systems. That was the case in Pakistan with Ayub Khan, when the regime he headed collapsed quickly and unexpectedly.

The much stronger Indian political system would have been able to deal with the adverse distribution consequences of rapid growth if another perception had not gained ground — that some of what made the rich very rich were not the consequences of risk-taking entrepreneurship, but the monetisation of close contacts with the policymakers. This group includes India, but not Bangladesh and Pakistan.

India, of course, produced in quick successions two egregious examples of the personal wealth created because of influence over government policymaking. The first was the estimated loss to the government of perhaps as much as $40 billion by the grant of mobile phone licenses to a number of companies favoured by the minister in charge in the government headed by Prime Minister Manmohan Singh. Under pressure from the citizenry, the minister had to resign his position and landed in jail. This “large amount of money for favours” episode happened under the watch of the prime minister representing the Congress. But it quickly turned out that such practices were not confined to one political party. Soon after the mobile-phone scandal became public, it came to light that governing members of the opposition Bharatiya Janata Party had their hands in the till as well.

There are deep concerns about the quality of governance in Pakistan as well. However, since the economy has been stagnating, there are not many rewards of growth that can be captured by narrow and powerful political elite. The Pakistani concerns are focused entirely on different aspect of governance. It is on the absence of quality governance by the legal and judicial systems. Those in Pakistan, who have focused on this aspect of good governance, have concentrated their efforts on ensuring judicial autonomy and on the reform of the legal system where it comes into contact with the common citizenry. The activists have been more successful in obtaining some movement in the former case — judicial autonomy — than in the latter, reform of the legal system.

The country’s sordid political history when the senior judiciary — the provincial high courts and the Supreme Court — were quick to give cover to palpable misuse of executive power to ride roughshod over the constitution of the day created a powerful precedence. This trend started under Chief Justice Muhammad Munir in the 1950s when he brought forward the “doctrine of necessity” to justify the dismissal of the constituent assembly by Governor-General Ghulam Muhammad. This line of thinking was happily followed by a number of successor courts when called upon to rule over the acquisition of authority by the executive at the expense of the legislature — sometimes also at the expense of the judiciary itself.

This has led to the growth of two very different citizens movements in these two South Asian countries. The focus in India in the campaign led by Anna Hazare, a Gandhian, is focused on creating an accountability mechanism that will be free of influence of the executive and legislative branches of the government. In fact, it will also have a degree of autonomy from the judiciary, the third arm of the government. If the Hazare movement succeeds in achieving its immediate objectives, it will have consequences for the working of the Indian democracy. This worries even the liberal community in India and also liberal watchers outside the country. In Pakistan, however, the concentration of citizen’s effort has been on getting an autonomous senior judiciary to watch over the working of the executive and legislative branches of government. The activists seem to have concluded that given the country’s poor record with accountability mechanisms, concentrating on judicial independence is the way to go.

[B]Source: [URL="http://tribune.com.pk/story/250105/good-governance-issues-in-south-asia/"]Good Governance Issues[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Employment-spending cycle[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 12 Sep, 2011[/B]

CONFIDENCE plays an important part in the health of an economy. When people are optimistic they spend more and save less. This increases the demand for goods and services. That leads businesses to hire more in order to meet the greater demand.
Increase in employment raises spending even more and that leads to another investment-employment-spending cycle. The reverse happens when people lose confidence which is the case now in both the developed and the developing parts of the global economy.

Employment is not increasing in most parts of the world economy. In the United States it is stuck at a bit more than nine per cent of the work force. Experts believe that there is a fifty-fifty per cent chance of another dip in economic activity. How should policymakers respond to this developing situation?

One important legacy of the Great Depression of the 1930s was the development of policy tools that could be used to take care of economic downturns. Such downturns are inevitable. They are part of the way capitalist economies function and develop. These business cycles could be tamed by the use of monetary and fiscal instruments. Which of these two was used depended upon the taste and ideologies of the policymakers.

Those of Keynesian disposition were inclined to use the budget to reduce the adverse consequences of the cycle. The government could pump money into the economy and create jobs for the unemployed which would increase aggregate demand and provide incentives to the private sector to start investing again.

The monetarists — or Friedmanites, after the economist Milton Friedman — preferred to use money supply to tune the economy. The central bank lowered interest rates by printing money and money’s lower cost provided the needed incentive for private entrepreneurs. Those in favour of this approach argue that the use of monetary instruments acted quickly whereas increasing public expenditure had longer time lag between policy action and desired results.

In either event, the cycles were short; mostly of “V” type. In most of the cases after the Second World War, the down turns were sharp but so was the recovery. Plotted on a chart, economic activity had a “V” shape. The economies quickly returned to the level of activity they were at before the downturn.

This has not happened with what was called the Great Recession of 2008-09. It was great because of the severity of the collapse of economic activity in all industrial countries. The sharpest decline in real GDP occurred in Japan with a fall of 10 per cent from the first quarter of 2008 to first quarter of the following year.The gentlest fall was in France with a decline of four per cent. The United States with five per cent and Germany with seven per cent came in between these two extremes.

Policy response to this event was a mixture of fiscal and monetary instruments. The governments acted together to provide fiscal stimulus to the economies.The central banks brought interest rates to near zero. The result was mild recovery in all Western economies. However, none of the economies regained the levels achieved before the downturn began. The United States was at the nearest point in the first quarter of the current calendar year while Japan, having recovered to four per cent below the start of the recession, dipped again to about six per cent decline. The GDP growth estimates for the United States in the second quarter of 2011 indicated a slowdown in recovery.

This led some to talk about a “W” shaped recession — a drop in activity followed by a mild rise, followed again by a decline, followed once again by mild recovery. However, some economists believe that it was premature to declare that the Great Recession had ended in the first quarter of 2009. A more accurate way of describing it would be to call it a “U” shaped recession, with a long and flat bottom. If this is the correct interpretation, what are the options available to those who make policy? This is where politics enters the picture.

With interest rates set near zero and with the Federal Reserve, the United States central bank, having declared that they will stay there for at least a couple of years, the only monetary instrument left is something called “quantitative easing”. The Fed has undertaken two of these — QE1 and QE2 — but there is political pressure on it not to go that route a third time.

In fact, Rick Perry, the leading Republican contender for President Barack Obama’s job in the elections of 2012 has warned that he would regard QE3 as a treasonous activity. While toning down his rhetoric a bit in the first Republican candidates’ debate on September 7 at the Ronald Regan Centre, he stuck to his basic position.

The ugly wrangling over the decision to raise the level of public debt in the United States means that another fiscal stimulation is not an option either. The Europeans have severe problems of their own with a number of weaker economies in the Union close to bankruptcy.This helplessness in the West has turned the attention of some analysts towards emerging markets. The European banks are under great stress having acquired significant amount of government debt issued by weak economies.

Much of this debt has been classified as “junk” by the rating agencies.

Since the downturn began, but especially after the weak recovery from it, the shift in economic power from the developed to the developing world is quite apparent. The International Monetary Fund has estimated that the output of developing Asia — which means all of Asia not including Japan — was seven per cent higher in the first half of 2011 compared to the level at the beginning of the recession.

The estimate for Latin America is two per cent higher. This has obvious implication for the share of developing countries in world output.The emerging markets are expected to account for 38 of global output by 2016 compared with just 25 per cent in 2007.This means that these economies are likely to increase their share in world product by 13 percentage points within one decade. Could they be relied upon to stimulate global economic activity?

The answer is not for the simple reason that together emerging markets have a current account surplus with the rest of the world. For them to stimulate global economy they need to run deficits. This is not likely to happen especially with China in the lead. A major adjustment in the Chinese exchange rate would act as a major stimulant for the global economy. If that were to happen, China will buy more from the West rather than run large trade surpluses with it.

But the Chinese have resisted the pressure on them — which was intense at times — to increase the value of their currency. The IMF’s projection is that China will go in the opposite direction with the current account surplus rising from 5.7 per cent in 2011 to 7.8 per cent in 2016. South Asia is also weakening because of the palpable decline in India which makes up 80 per cent of the region’s output.The Pakistani economy remains weak mostly because of security concerns and unsettled politics.

The conclusion is obvious but disturbing: it is politics that is keeping the West and the emerging world from responding to the economic challenges it faces. To paraphrase James Carville, an advisor to President Clinton, “It is politics, stupid rather than economics".

[url=http://epaper.dawn.com/ArticleText.aspx?article=12_09_2011_606_004]Employment-spending cycle[/url]

The Pakistani ‘state’ under stress — I
 

[B][U][CENTER][SIZE="5"]The Pakistani ‘state’ under stress — I[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: September 20, 2011[/B]

The state of the Pakistani state is currently weak and is becoming weaker with every passing day. To understand what is happening, it would be useful to look briefly at the country’s roller-coaster political history which has resulted in confusing the meaning of the state as understood in Pakistan. In going into the history, I will also briefly write about a conversation I had with President Ziaul Haq a few weeks before he was killed in an airplane crash.

Look at any dictionary for the meaning of ‘state’ and clues begin to appear why this particular organism is so much under stress in most parts of the world. My dictionary attaches many meanings to the word ‘state’. It says: “It is the supreme public power within a soverign political entity”. Or is it? In some of the South Asian nations, the state can no longer be said to exercise the supreme authority given to it by the basic law of the land — the constitution. Competing sources of power have emerged. This is particularly the case in Pakistan.

Is the state the supreme public power in the soverign entity called Pakistan? According to the second dictionary definition, the state is “the sphere of supreme civil power within a given polity”. According to this definition, the state is equated with civilian authority and that authority is put into place by the people through elections. It is widely known — at least widely understood — that on several matters, the legally constituted state in Pakistan does not exercise the powers given to it by the 1973 Constitution. On issues pertaining to external security and on matters concerning India, the elected government does not have the ‘supreme authority’. It must listen to the military and within the military to the army high command.

The other example of the state not performing its functions as defined by law also comes from Pakistan. On two occasions, the ruling authority — in both cases a military leader who usurped power — amended the constitution to make the president rather than the parliament the supreme authority in the country. This was done by General Ziaul Haq’s Eighth Amendment to the constitution adopted on November 9, 1985. The amendment shifted the locus of authority from the parliament to the president. A provision was added to Article 48 according to which “the validity of anything done by the president in his discretion shall not be called into question on any ground whatsoever”. To this provision was added a new clause to Article 58 according to which “the president may dissolve the National Assembly in his discretion where, in his opinion, a situation has arisen that the government of the Federation cannot be carried out in accordance with the provision of the constitution and an appeal to the electorate is necessary.”

General Zia used this provision in May 1988 to dismiss Prime Minister Muhammad Khan Junejo and dissolve the National Assembly. The dismissal came with the announcement that general elections would be held in October as provided by the amended constitution. However, the president had no intension of keeping his word. He told me, in a meeting I had with him, on July 30, in his office in Islamabad, that he was working on drastically changing the constitution by going in for a presidential form of government. The country was to be divided into 20 provinces, each to be administered by an appointed governor. This, he said, was recommended by a commission he had appointed under one Justice Ansari. He provided me with this information after offering me the position of finance minister in the caretaker government he had put into office after dismissing Junejo. When I demurred saying that I wished to continue with my job at the World Bank, he said with a smile that he knew why I was reluctant to accept his offer. “You think elections will be held in October and I will hand over power to the elected prime minster. None of this will happen. I am going to be around for a long time”. This was the last time I met him. He was dead within less than three weeks of this meeting.

Under the eighth amendment President Ziaul Haq, in other words, had acquired almost dictatorial powers. This provision remained and was used three times by two of his civilian successors. It was removed by the 13th Amendment to the constitution approved in 1997, when an elected government with a large mandate took office. It was reinstated by the Seventh Amendment, introduced into the constitution by General Pervez Musharraf, the fourth military man to govern the country. This was adopted on December 17, 2003 before the army chief of staff was prepared to share power with an elected parliament. The amendment restored the powers of the president to dissolve the National Assembly and dismiss the prime minister. It also incorporated 10 laws into the sixth schedule of the constitution, four of which established the system of local government in the provinces. These laws “could not be replaced or amended without the previous sanction of the president.”

This encroachment by the president into the powers of an elected parliament was removed for the second time by another amendment — the 18th Amendment — adopted by the parliament, elected in February 2008. The amendment was approved in April 2010 and signed into law by President Asif Ali Zardari on April 2010, a year and a half after being elected president.

Has the 18th Amendment restored a parliamentary form of government in the country? The answer is no, since the president continues to wield power that goes beyond that permitted by the constitution. He does that by virtue of the fact that he is also the head of the political party that has the largest presence in the national assembly. The prime minister, the constitutional head of the government and directly elected by the people is, in practice but not in terms of law, subservient to the head of the state, who is indirectly elected. In other words, in practice, Pakistan is not being governed according to the basic law of the land. The supreme power in the state is in the hands of a state functionary who is exercising power that goes beyond that sanctioned by the constitution. This confusion about the locus of power hurts the working of the state and is weakening it.

[B]Source: [URL="http://tribune.com.pk/story/255723/the-pakistani-state-under-stress--i/"]The Pakistani State under Stress[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Towards a multiple reserve currency system[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 19 Sep, 2011 [/B]

THE global financial system is fast losing confidence in the US dollar. The disenchantment with the once mighty dollar may come as a surprise only to the people in the United States, including those responsible for making public policy. Elsewhere it is treated as a fact of life in the new global economic order.
Given the way the world economy is restructuring — the United States is losing its preeminent economic position while some of the large emerging markets are gaining on it — the American dollar cannot remain the dominant currency in the global market place. The world is headed towards a system of multiple reserve currencies.

How soon will this change happen? The answer to the question is “not very soon”. It might take a decade or two but there can be little doubt that the dollar will be joined by a number of other currencies nations around the globe will use for making transactions. Given its economic and financial difficulties, Pakistan will have to be a passive player in the new currency game. As discussed below, it will have to look to Beijing for guidance.

The emergence of the dollar as the sole reserve currency happened quite quickly as the Second World War drew to a close. At that time, the European nations were in debt to the US, owing it large amounts of money.The US was prepared to forgive a part of the debt in exchange for an international monetary system it could control. This led to the creation of the Bretton Woods system in which all currencies were pegged to the dollar while the US pledged to settle any claims the world had on it in terms of gold which was to be traded at the fixed rate of $35 to a troy ounce.

A new institution, the International Monetary Fund, was established to administer the system. The US obtained veto power over the decisions the Fund would be making; any change in the “articles of agreement” — the Fund’s charter — would not be made without the consent of Washington. The United States thus emerged as the world’s economic leader, unchallenged by any other state.

The Bretton Woods system lasted for a quarter century. In 1971, President Richard Nixon took the unilateral decision to un-peg the dollar to gold. After his move, the US was no longer obliged to settle its account in gold if that was demanded by the creditors states.

At that time Germany and France had large balances in their favour and there was a fear in Washington that they may want those to be settled in gold. Had that been demanded by Bonn and Paris, it would have nearly emptied the US gold reserves. The US moved unexpectedly and the Europeans were left with heavy losses in terms of the value of their US assets in gold since the price of the metal climbed quickly after the announcement by President Nixon to de-link the dollar.

This memory of the demise of the Bretton Woods system lives even after half a century. The countries that will see their currencies become international reserve currencies would first want to create an in stitutional structure in which no country has the veto over decisionmaking. This would mean a major change in the way the IMF now works. A reformed Fund would have to have sharing of power and policymaking on the basis of consensus. With no Second World War type of emergency being confronted by the international community, the reform of the Fund would take time.

It will also take time since learning a lesson from the Standard & Poor’s downgrade of the United States – the agency brought the rat ing of the US government debt a notch, from AAA to AA+ — the holders of large foreign currency reserves will want to have a say in the way the large countries with reserve currencies manage their fiscal systems.

Most of the large reserves are held by the countries in Asia but they have, at best, played a marginal role in global financial affairs. The Chinese have already laid the ground for increasing their influence. They, for instance, asked the United States to better manage its budget and reduce the amount of debt the country has accumulated over time. They have given the same advice to Europe. In both cases they were heard but with some resentment.

The new multiple currency reserve system will, in all probability, be built around four currencies – the dollar, the euro, the Japanese yen, and the Chinese renmenbi. Among these, the Chinese currency is the only one that is not fully convertible. It will have to be that for it to become a reserve currency. This too will take time. The Chinese have a strong preference for moving with great care when it comes to adopting major changes in the way they manage their economy. They call it “crossing the river by feeling the rocks”.

They also like the change that has been tested first in pilot projects. This is the way they reformed land ownership in the countryside and the transformation of some of the state-owned enterprises. In moving to towards the convertibility of the renmenbi, the Chinese are also feeling the rocks. They have opened the Hong Kong market to some extent for international transactions in renmenbi. They are also negotiating currency swap arrange ments with a number of trading partners in which payments will be made in local currencies rather than in the dollar or the euro.

Pakistan is included in the group of countries with whom the Chinese would like to conclude a swap arrangement that would cover part of the trade between the two countries and would remain in place for three to five years. Beijing is working on these arrangements with the countries in its immediate neighborhood not with the countries with which it has large trade balances.

For these reasons, it is clear that while the days of the dollar being the predominant currency in the international market place are numbered, the transition to a new system will happen very slowly. Given the uncertainty that currently surrounds the future of the dollar, some ad hoc arrangements will be made until the new system is formally ushered in. This will take a while in normal circumstances but that may not be the case if the world economy plunges once again into a recession making the slowdown that began in 2008 into a double-dip event.

Even if that does not happen, new competitors will arrive on the scene to challenge the dollar. According to one analyst writing for the Financial Times, “the currencies that are appreciating the most are part of the emerging China bloc, such as the Aussie dollar, the Brazilian real, and, increasingly, the Canadian dollar at a time when China’s economic performance continues its fine balancing act.” Some of the other currencies in the region in which China now is the dominant economy, may also become a part of the bloc.These include the Korean won, the Thai Baht and the Singaporean dollar.

[url=http://epaper.dawn.com/ArticleText.aspx?article=19_09_2011_605_005]Towards a multiple reserve currency[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The Pakistani ‘state’ under stress — II[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: September 25, 2011[/B]


I return to the subject I introduced in this space last week. In the previous article, I suggested that the state in Pakistan is not organised the way it should be; it does not function according to the meaning that is generally attached to the word ‘state’ in most dictionaries. Nor does it tally with the expectation political scientists have about the functioning of democratic states in the developing world. What is present in Pakistan today, is a confused state of affairs about the legitimate functions of government. There are good reasons to raise a number of questions about the functions of the state: what should they cover, who should perform them and from where they should be performed? I will ask what I consider to be important questions; the answers to them will be implicit in the way the questions are phrased.

History is one reason why the confusion about the meaning of the state prevails in Pakistan. Often, those who had become responsible for the state — or had made themselves responsible for it — did what they were not expected to do. They undermined the basic law of the land. On two occasions the constitution was abrogated, in both cases by military leaders who were convinced that their mandate for taking those decisions was implied in the positions they occupied. On a number of other occasions the constitution’s basic structure was seriously compromised. It is happening once again, since, the locus of executive authority rests with the person and in the place where it shouldn’t be under the constitution, as amended recently.

That Pakistan has a long history of deliberately confusing the assignment of responsibility to various actors in the functioning of the state is not good enough reason to continue with this practice. Lack of clarity about the locus of power is particularly troubling at a time when the country is dealing with so many crises at the same time. Pakistan is now in the eye of a perfect storm. As I write this, The Washington Post reports on a series of meetings held between the senior American and Pakistani leaders. US Secretary of State Hillary Clinton, met with Pakistani Foreign Minister Hina Khar in New York; Admiral Mike Mullen, chairman US Joint Chiefs of Staff, met with General Ashfaq Kayani, Chief of Staff of the Pakistan Army in Madrid; and David Petereus, Director of CIA met with Lt. Gen. Ahmed Shuja Pasha, Director of ISI, in Washington. While these meetings were being held, Leon Panetta, the new Secretary of Defence in the Obama administration, issued what the American press called an ultimatum to Pakistan. Islamabad was being asked to move against the Haqqani network operating out of North Waziristan. It was held responsible for the recent attack on the American Embassy in Kabul and possibly also for the assassination of Burhanuddin Rabbani, who was attempting to negotiate with the Taliban on behalf of the government in Kabul and the US. It is clear that Pakistan is now in America’s cross-hairs. Will Washington move against the country, if Islamabad does not, to do its bidding?

It is not clear who has the responsibility of crafting an appropriate Pakistani response to the pressure from the US. Does the responsibility rest with the prime minister and the parliament as it should under the constitution or is the president in charge? The constitution assigns the president a very limited set of responsibilities. If he is calling the shots from where does he draw that authority? Is the military formulating the policy response to the Americans? If so why?

Then there is trouble brewing on the economic front. Pakistan appears to have decided to terminate its relations with the International Monetary Fund. This will not only deprive the country of some $4 billion of additional money which remains undisbursed from the arrangement concluded in 2009. It will seriously limit the country’s access to other sources of official finance. Once again it is not clear who took the decision and for what reasons. Did the cabinet decide to walk out of the arrangement? Was the decision the result of the reading by the politicians in power that they did not have enough clout with the citizenry to do what the Fund wanted Pakistan to achieve: to raise enough resources from within the economy to provide the government the money it needs to fulfil its many basic functions. Whoever took the decision to walk out of the Fund arrangement should have looked at the alternatives that are available for financing the legitimate functions of the government. If the politicians do have some alternatives in mind, what are they and how will they be tapped?

Pakistan is once again dealing with devastating floods caused by rains that were expected. Were preparations made to save the people from being hurt once again after they had suffered so much from the Great Flood of 2010? What were the lessons learned from the government’s handling of the disaster last year and how were these applied for managing similar emergencies?

Have the policymakers given any thought to creating an institutional mechanism for dealing with the type of emergencies and crises the country faces? Most countries have some variant of National Security Councils that pull in various functionaries from different branches of government as emergencies arise. Such an institutional structure exists in countries as diverse as the US and India. In both cases, high quality staff does the background work to facilitate the making of policy. Such an institutional structure was in place when General Pervez Musharraf was the head of the state. It functioned for a brief period when the current rulers came to power. In both cases the councils were not adequately staffed. Why was this mechanism for providing professional backing for serious policymaking done away with? Could it be that the ad hoc way of policymaking suits the temperament of those who deal with the affairs of the state at this time?

Pakistan is too large a country and faced with just too many crises to handle state matters with such casualness. The questions raised here and several other that are also important need to be asked and the policymakers who are determining the future of 180 million people need to provide some convincing answers.

[B][I]Published in The Express Tribune, September 26th, 2011.[/I][/B]

[url=http://tribune.com.pk/story/260062/the-pakistani-state-under-stress--ii/]The Pakistani[/url]