History’s many burdens

By Shahid Javed Burki
Tuesday, 25 Aug, 2009

MOST regions carry the weight of history. For many of them the weight is heavy. In this respect South Asia is not all that much different from many other parts of the world. The only difference is that while other regions have been able to find ways to cast off these burdens, South Asia still carries them in the 21st century.

This is unfortunate since this is likely to be a century of change with significant realignments among the world’s large economies. For South Asia to gain a position in the fast-changing global system it will have to resolve some of the many inter-country conflicts that have bedevilled the region for so long. How several world regions managed to cast off the burdens of history has lessons for South Asia, in particular for India and Pakistan.

Since a great deal can be written — in fact has been written — on the subject of persistent inter-country conflicts in South Asia, I will say little on this subject and from a very different angle. My preference is to call this subject the burden of history. I call it a burden since it is my view that the weight the South Asians have carried for decades needs to be lifted if the region is to realise its considerable economic potential.

One important point to be made in this context is that the purpose of delving into history is not to open old wounds. These wounds were inflicted as a result of the deep suspicions in the way the South Asians looked at one another. The reason why that has happened is that the past is interpreted by every country from its own perspective. The South Asians are like the various players in Akira Kurosawa’s Japanese drama Rashomon where several people see the same crime committed but tell it from their own perspective. There is a great need for countries to develop a common historical narrative.

Rewriting the history of South Asia should start with a recognition of how in the distant past as well as in the more recent present complex societies managed to shed their differences and work together for the common good of the citizenry.

Sometimes this happened because enlightened leaders emerged simultaneously in different places and were able to look beyond the past and convince their people that working with neighbours had greater rewards for them than labouring against them. Sometimes the impulse for integration was generated by the realisation that past conflicts had been extremely costly and continuing them was not in anybody’s interest.

A great deal has gone wrong in the South Asian region because of the way India and Pakistan looked at each other. Being almost paranoid in their perception of the other’s intentions, they have cost the area a great deal in terms of lost opportunities.

These “what if…” exercises — what would have happened had the countries behaved differently towards each other, for instance — are difficult to quantify. However, based on some of the earlier work by me on these lines and concerning the cost to Pakistan vis-à-vis the Kashmir dispute, it would not be an exaggeration to suggest that had India and Pakistan not been so obsessed with each other and had not spent so much on their respective militaries, their combined GDP may have increased by as much as two percentage points each year.

Compounded over so many years this is not a trivial amount. But for the concentration of so much energy against each other, India and Pakistan today would have much larger economies, a far higher income per capita and fewer people living in absolute poverty. It appears that India is breaking out of this mould and Pakistan may be similarly disposed. But the two countries have been doing this for different reasons.

For India, its continuing obsession with Pakistan is costing it a more prominent place in the global economy and the evolving international political system. For Pakistan, the realisation appears to have finally dawned that the country’s real enemy exists within its borders and not on the other side of its frontier. If this reading is correct the economic rewards will come sooner for India than for Pakistan since the latter will remain engaged with its internal enemies for a while. That said, by redefining the threat to its security, Pakistan could set itself on a very different course.

Although economists have ignored the dividends of regional peace in identifying the determinants of growth for the ‘miracle economies’ of East Asia, the fact remains that the absence of inter-country conflict in this area was an important contributor to economic growth. This could happen in South Asia if its various conflicts get resolved. Among them are the long-enduring suspicions between Afghanistan and Pakistan which I will comment on in a later article.

Here, I recall a conversation with Prime Minister Manmohan Singh in his New Delhi office in December 2005. I had gone to see him to discuss the study I was then doing for USAID on the South Asia Free Trade Area. I had known Mr Singh for several years but it was the first time I was meeting him as prime minister. He told me that in one of his conversations with President Pervez Musharraf he said that neither had worked hard to gain the offices they then occupied. “We are both accidental leaders but since we are now here we should use our positions to bury the past and work for improving the economic and social welfare of our people,” he told President Musharraf. By moving in that direction at Sharm El Sheikh, Manmohan Singh may have taken a small step in that direction.

The China connection

By Shahid Javed Burki
Monday 31, August 2009

IN a long one-to-one conversation with President Asif Ali Zardari late last year I talked about Pakistan’s economic relations with China, one of the two large countries that borders Pakistan. The other, of course, is India. The president said that it was his wish to put the relations with China on firmer footings rather than on ad hoc developments of the links that marked the past.
I thought then – and continue to believe even more strongly now – that the president was on the right track. Pakistan needed to develop a strategic relationship with its large neighbour. Pakistan should see China as an opportunity not as a competitor in the global market place. However, in order to make this dream real, policymakers in Islamabad needed to develop a fuller appreciation of what was happening in China and how that would affect Pakistan.

There is conventional thinking and then there is unconventional thinking about China’s economic future and how it will influence the world. Conventional thinking accepts the fact that China’s rate of economic growth will continue to outpace by a wide margin the rate of increase in America’s gross domestic product. Inevitably, even though the size of the Chinese GDP at the end of the first decade of the 21st century is about a third of the United States’, it will equal that of the latter in about a couple of decades. If the present trend continues it will overtake the United States before the 21st century is too old, perhaps as early as 2030.

Conventional wisdom also accepts the fact that in matching the size of the US economy in the coming decades, China will have departed significantly from the well established pattern. On previous occasions the catching up was done by the economies that were not very dissimilar from the one that was in the lead. This happened when France caught up with Britain after the latter had taken off because of the industrial revolution. Germany came next and then the United States. The Soviet Union tried to catch up with the western economies in the second half of the 20th century by adopting a very different model of economic growth. It failed spectacularly. But China is likely to succeed. What makes this catching up very different from the earlier ones is that it will be done by a very populous country that will remain poor in terms of per capita income terms. The consequences of this event will be very different than those that resulted from the previous catch-up periods.

As to how China will maintain this extraordinary growth path is a question that begins to separate conventional thinking from the unconventional wisdom. The first major difference between these two points of view concerns the links between China and the western world. According to conventional wisdom, China’s growth model will keep it dependent on the markets of the developed world. If these falter for some reason, China will be unable to maintain its hectic pace of growth.

And if the rate of growth falters, China will have to deal with a slow down in the rate of growth in employment. In fact, it may have to deal with massive layoffs of workers. The current slow down has cost 20 million workers their jobs. If this trend persists there may be social unrest which the Chinese system may not be able to absorb.

Unconventional thinking suggests that the future growth of the Chinese economy will forge new relationships between China and Asia in particular and that the process may have already begun. Some recent economic data about the way the “second rise of China” is affecting the Asian economies has already begun to lend substance to the second view, the unconventional one.

I have used the phrase “China’s second rise” in some of my earlier writings to distinguish it from the one that propelled China to the front of the global economic system. China became the world’s industrial workshop, producing cheaply manufactured goods for consumption in the United States and Europe. Those links had profound influences on the western economies. Exports from China resulted in the restructuring of the international production system as firms relocated their production facilities by closing down operations in the old industrial countries and relocating them in China. Politicians began to call this process “exporting of jobs” and railed against it. It became a major issue in the contest for the American presidency in 2008.

These were well noted results of China’s first rise. By exporting cheap products to the western markets China contributed to the low rate of inflation in these countries. Interest rates also remained low which helped firms to borrow and invest in the process of restructuring in which they were engaged. By exporting much more than it was importing, the Chinese built up large foreign exchange reserves. When the current crisis began in the West, Beijing held $2.1 trillion of reserves. The crash of the western economies had the expected consequences for the Chinese economy.

The West has not fully noticed that the way the Chinese are stimulating their economy will make it less reliant on the export industries on which it relied so heavily in the past. Beijing has used both the government’s budget and the state controlled banks to pump money into the economy. While most of the public sector money has gone into building new infrastructure, the banks have lent for investing in increasing the capacity of the economy to increase production. The government is putting almost $600 billion into the construction of infrastructure while the banks have doled out more than $1 trillion in loans in the first half of this year. More will come in the second half.

There are two points about the Chinese economic effort that most analysts have missed but are of tremendous significance for the global economy. Citigroup recently increased its estimate for annual Chinese economic growth to 8.7 per cent in 2009 from 8.2 per cent, and to 9.8 per cent in 2010 from 8.8 per cent For the first time the catalyst of global economic revival is coming from China in pulling the world economy from the deepest recession since the Second World War. Second, China is pulling with it the rest of developing Asia. Exports to China from East Asian economies rose 18.7 per cent in the second quarter of 2009, according to customs data, a sharp turnaround from the 16.2 per cent drop recorded in the previous quarter. There is no doubt that the centre of gravity of the global economy has begun to shift towards China. Islamabad should begin to understand the changes taking place in China to develop a sound strategy concerning its relations with that country.

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Medical driver of growth

Pakistan should focus on health services and set up a Medical City. The well-to-do Pakistani diasporas in the US and Canada should be invited to become partners.

By Shahid Javed Burki
Tuesday, 01 Sep, 2009

ONE of the themes explored in these columns has been how to develop the Pakistani economy by using a new driver of growth.
I have maintained that the economy has missed the opportunity when first the East Asian economies and then China used their productive sectors to create space for themselves in the markets of the industrial world.

The industries they developed first focused on the simple low-priced consumer goods and later on more sophisticated goods. South Korea, for instance, is now competing with Japan in the export of luxury automobiles, Taiwan exports laptop computers and has become a major contributor to the development of nanotechnology. China has begun to manufacture aircraft parts and is becoming a large developer of solar technology.

The Indian growth model took a different line, using the large supply of skilled engineers and the contacts the non-resi dent Indians — the NRIs — had in America’s corporate world to build a vibrant IT industry that is now the envy of the world. In a general sense, I have been suggesting that Pakistan should search for a niche it could develop to ex ploit its skill base and its own diasporas to gain access to the global market.

Given the way the global economy is growing and changing its structure, the opportunities lie in the service sector. Within the service sector Pakistan should perhaps focus on health services. To develop this point I will today make a specific suggestion in the hope that it will attract the attention of policymakers in Islamabad as well as operators in the private sector who have the requisite skills, experience and competence. But the government will need to take the initiative. In this context what could it do? It is in answering this question that I will get into some specifics.

The government may set up a public–private-sector company to develop a site and call it the Medical City. Some pleasant location should be found — something like the Kalar Kahar area on the Islamabad-Lahore Motorway. The area has a relatively pleasant climate, has a great deal of history and very good road connections with Lahore and Islamabad, two of the largest urban clusters in Pakistan.

While initially capital for developing the site could come from the government, the extremely well-to-do Pakistani diasporas in the US and Canada should also be invited to become partners. These diasporas have a large number of medical personnel who are well-to-do and looking for business opportunities in Pakistan. Some of them have already invested in setting up hospitals and clinics in the country but these initiatives were taken on an ad hoc basis.

Pakistani expatriates have set up hospitals in Lahore, Islamabad and Karachi but they are operating as separate institutions. The idea behind the establishment of the Medical City is to make these efforts fit into a well-developed programme.

To begin with this programme should concentrate on three things. It should establish a hospital that concentrates on catering to the needs of the Pakistani population in areas that are not well covered at this time. In focusing on these, the needs of the Middle East and Central Asia should also be kept in mind. These would then become the catchment areas for the City. A teaching hospital and nursing institute should be developed alongside the hospital with a view to meeting the need for skilled personnel.

The second part of the plan should include locating, alongside the hospital, specialised institutions dealing with some areas of concentrations. These institutions should provide not only healthcare in these areas but also research facilities. The aim should be to establish world-class institutions in specific areas that will attract students and researchers from neighbouring countries.

The third element of the programme should be the development of a financing plan for the building of the City and developing it over time. The plan should have a combination of public resources and private money. Initially the City should be presented as an investment opportunity for venture capital firms that specialise in healthcare. Once the facilities have been created, private-equity firms could be attracted to take positions in the enterprise with a view to taking it to the capital markets. This would provide continuous access to fresh capital.

What I am proposing is an establishment that would work for profit. That said, there should be adequate provision for making it possible for the poor to access the facilities located in the City. This could be done by creating a fund that should have contributions from the government as well charitable organisations.

Is something like this possible in a country in Pakistan’s situation? Would it be able to attract the clientele essential for making such an enterprise a success? Initially the City would cater to Pakistan’s large population but once it develops a reputation the geographic area from which the users come would expand. When Pakistan no lon ger has the reputation of being a place unsafe for foreigners it could become the destination for what has come to be called medical tourism. India has become a beneficiary of this type of market. There is no reason why the Indian experience cannot be replicated in Pakistan.

My view is that it will work for the reason that there are a variety of people and groups who are interested in some aspects of the programme outlined here but are looking for the support of an institution that will bring together these interests. The government is best able to do this.

A task force that includes both the public- and private-sector people could be assigned the job of developing these ideas. The people included in it should represent the various disciplines that will need to be tapped to give shape to this type of initiative. The task force could be located in the Planning Commission.

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Expanding government

By Shahid Javed Burki
Monday, Sep 07, 2009

IN many ways, some of them much too subtle to be grasped easily, the role of the government is likely to change quite significantly in the years – perhaps even decades – to come.
It is known from experience that ideas about economic governance readily flow across national borders. This happened in the 1980s when what came to be called Reaganism or Thatcherism, depending on which side of the Atlantic you happened to be, relegated the state to the sidelines.

This economic philosophy had tremendous consequences for policymaking in countries such as Pakistan that had to take advice from Washington and London in order to access the foreign capital that was desperately needed. Under this approach, Pakistan during the period of President Pervez Musharraf, adopted an approach that gave a great deal of space to the private sector and pushed the state to the background. But foreign influence was not the only reason why that happened. Economic policymaking at that time was led by an individual whose own background was in commercial banking with very little knowledge of economics and even less interest in strategic thinking.

Under his stewardship, the private sector ascended the commanding heights of the economy while the institutions of the state were allowed to weaken. Two sets of institutions were affected adversely in particular. The Planning Commission was virtually taken out of the business of strategic work and regulatory institutions that could oversee the working of the private sector were not given the autonomy they needed to work effectively.

The thinking on the economic role of the state has changed quite dramatically over the last several months. This creates an opportunity for Pakistan to redefine the state’s role since it will not be forced to go in a different direction by institutions such as the IMF on which the country is once again dependent for access to external capital.

There are at least four reasons why the thinking has changed. The first, of course, is the deep economic recession across the globe. This started in the United States where the private sector, left more or less to its own devices, showed that the assumption that it could self-regulate was totally misplaced.

Alan Greenspan’s belief that the state should keep itself at a long distance turned out to be totally misplaced. With the private financial sector having gotten itself into a series of tight situations, it had to rely on the state to get it out and to have it functioning again.This was done with a great deal of public money doled out to the banks and to the automobile sector. Without formally nationalising parts of the private sector, the US government now owns large chunks of the assets in a number of vital sectors.The second reason for the disillusionment with this philosophy was the growth in income disparities in a number of countries that had followed it aggressively. In the United States the gap between the incomes of the well placed executives and owners of assets and their workers increased to the point that it became a political issue. President Barack Obama owes his impressive victory in last year’s presidential election to the growing public discomfort with growing income and wealth disparities. He promised “change” from the past and won handsomely against a candidate who wanted the continuation of the status quo.

The third issue with the philosophy that granted the private sector so much space was the way a number of corporations and wealthy individuals acted and swindled the state as well as those who were relatively less affluent. Enron Corporation and Worldcom were two companies in which their owners and managers built huge fortunes at the expense of the government – by avoiding to pay taxes – and at the cost of the middle class who owned shares in these companies and relied on the pension funds the companies managed. The fact that a number of these managers went to jail was small comfort for those who has lost a great deal of money and the promise of good life after retirement. They wanted the system to be changed. The fourth reason why the private sector system of economic governance is being replaced by the one in which the state will play a much more important role is that the latter was shown to be demonstrably better than the former. European capitalism that cared more for the poor and the disadvantaged placed less burden on the society than did Reaganism and Thatcherism.

The Asian countries also demonstrated that their system of the state being more prominent was also producing better results. The most recent example of this is the crushing defeat of the Liberal Democratic Party (the LDP), at the hands of the newly formed Democratic Party.

The LDP, in spite of its name, was as conservative in its approach towards economic management as the Republicans in the United States and the Conservatives in the UK. Yukio Hatoyama, the presumptive Japanese prime minister, rallied campaign crowds with his pledge to shift away from what he said were “excessive reforms” in the economic system.

“The recent economic crisis resulted from a way of thinking that was based on the idea that American-style free-market economics represents a universal and ideal economic order”, he wrote in an article first published in a Japanese monthly magazine and reproduced by The New York Times.The American system, he went on to say, was “void of morals or moderation”.

These developments in economic and political thinking need careful reflection in Pakistan as the country struggles to revive its faltering economy and put in place a new political structure. Having relegated the state to the background during the period of Pervez Musharraf, the country needs to bring the government back into play.

How should that be done; what should be the respective roles of the government at various levels, not just the centre but also in the provinces and at the local level; how should the state be provided the skills and the talent it needs to run an effective system of governance; what is the best way of holding those who hold public positions accountable for their deeds; and how should economic strategies be formulated and what kind of political involvement should be included in this process? These are vital questions and they need to be studied. Some good work was done by the commission headed by Dr Ishrat Husain.The report he prepared appears to have been shelved. Perhaps one way of moving forward in this area is to release the report to the public and to begin a dialogue.

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Change in Asia

By Shahid Javed Burki
Tuesday, 08 Sep, 2009

ASIA is changing rapidly and change is coming from several different directions. With the exception of China, it is the exercise of democracy through elections that is producing the change. China is on the fast track to become the world’s most prominent economy.

India is also making rapid economic advances but the most important development in its case is the clear signal sent by the electorate in this year’s elections. The voters were unambiguous in their message: they would not tolerate extremism of any variety, and certainly not one that would allow Hinduism to become the dominant force.

The development of the Indian political system has also influenced the countries on its periphery. Pakistan, after being dominated for years by the military, has turned the corner and is now engaged in developing a political structure in which the will of the people will prevail. Bangladesh is moving in the same direction. It has also discarded strongman rule in favour of a system based on people’s representation. Sri Lanka continues to follow a broadly representative system but has still to come to terms fully with minority rights.

Also significant is the way some of the Asian governments have decided to enforce the writ of the state in cases where some of their people, after having operated from the margins of the political system, attempted to use force and intimidation to increase their influence. Pakistan is at the forefront of the war against non-state operators and has gained some successes in recent months. Its operations in Swat appear to have been successful.

Afghanistan is the only South Asian country that is still struggling to find a direction. The presidential election held last month has not resolved ethnic differences that have continued to weaken the central government and allowed local warlords to maintain their control on the population in their areas.

There are also changes in some other parts of Asia. The Chinese government has reasserted its control on the economy and the evolving political system. Its approach towards economic management with the state playing a commanding role is no longer considered to be off-base. This is where the rest of the world is also going — a subject I will discuss in some detail next week in this space.

Another change, not entirely anticipated that has occurred was produced by the elections held in Japan on Aug 30. The Japanese voters threw the Liberal Democratic Party out of power for only the second time in the country’s post-war history. The LDP had governed for more than 60 years; its rule was briefly interrupted by the narrow victory of the opposition a couple of decades ago. Then the opposition was able to govern for only 11 months. It was too fractious to rule and the coalition fell apart bringing the LDP back to power.

This time the change is likely to last since the Democratic Party has won massively. It has captured 308 of the 480 seats in the lower house of parliament. Working with the smaller parties, it has enough of a presence in the lower house to pass important legislation. When the incoming Japanese prime minister, Yukio Hatoyama, forms the government he will set the country on a path that will deviate significantly from the one Tokyo has followed since its defeat in the Second World War.

Change will come but it will come slowly. Coming slowly, it will endure for a long time. What the world may see is a significant restructuring of the global political and economic order. There will be change in four areas, all of them significant for the world. Japan will begin to address the problem posed by a rapidly ageing population, it will redirect public money towards the less advantaged segments of the population, it will redefine its relations with the US and it will get closer to its Asian neighbours, in particular China.

Watching this development from Pakistan, it is the last two changes in public policy that should be of interest. If Hatoyama begins the process of disengaging his country from the United States, it will not happen suddenly. The first series of adjustments will concern the positioning of the American troops on the island of Okinawa which has become a contentious issue. The Democratic Party had pledged in its manifesto that the agreement with America will be renegotiated. The agreement allows the US to keep 50,000 soldiers on the island.The other change will be the Japanese withdrawal from another agreement that has the Japanese ships fuel the American fleet in the Pacific. This is controversial in Japan; it has been vigorously opposed by the left especially as the refuelling involves the fleet engaged in active operations as has been the case in the Iraq war. As Japan begins to pull back from a close military relationship with the US, Washington may get even more dependent on India as a friend in the Asian region. If that happens it will have implications for Pakistan.

The second area of interest for Pakistan will be the likelihood of closer relations between Japan and China. Since Beijing has been close to Islamabad for decades — it has been rightly called Pakistan’s ‘all-weather friend’ — it is conceivable that we may be seeing the emergence of two blocs. Washington may form a close working relationship with India while China, Japan, Myanmar, Bangladesh and Pakistan — the last three countries nervous about India’s hegemony in the region — may form some kind of an alliance. The main point to be underscored is that the election in Japan has produced a dynamic of considerable consequence for Asia, in particular Pakistan.

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South Asia’s failure to develop an identity

By Shahid Javed Burki
Monday, 14 Sep, 2009

IN the lead up to any discussion of the various regional integration initiatives taken by the governments of South Asia over the last several decades, three points are worth highlighting. South Asian governments have found it difficult to turn to regional integration as a way of promoting economic development in the area.
This has happened even though there is recognition in the world that, notwithstanding trade theory, size matters in international trade. For the smaller countries in the developing world, size can be enlarged through regional integration.

At this time the world has hundreds of regional trading arrangements not only involving developing countries but also industrial nations. The most successful of these is the European Union which was initially set up to administer trade in two commodities – coal and steel – among the European countries. It is now a full-fledged customs union of 27 countries some of whom have abandoned their own currencies in favour of the Euro, a common currency managed by the European Central Bank.

While the developing world does not have any example of regional cooperation that matches the success of the European Union, some regional integration initiatives have succeeded more than others. The Association of South East Nations, the ASEAN, has evolved into a viable regional arrangement that is moving, albeit slowly, towards a custom union. In the southern part of Latin America, the Mercosur arrangement has scored both economic and political successes.

If regional arrangements can make contribution to economic development and if there are cases of success in other parts of the world, why have the countries of South Asia not been able to move in that direction? This should have happened given South Asia’s “historical and civilizational links” in the words of Professor Baru who has written a paper on the subject for the Asian Development Bank.

However, this notion would be rejected by many in each of the countries of the region since each one of them is seeking to establish not just their individual national identity, but also a distinct cultural identity. “What geography proposes, history disposes” writes Baru. In other words, the countries of South Asia carry a heavy burden of history in which hostility towards one another has developed over time.This was the result of the actions taken early on as each country attempted to develop an identity of its own.The most obvious example of this is to be found in the troubled history of relations between India and Pakistan, South Asia’s largest countries.

The second reason why South Asia has been so slow to move forward in terms of regional integration is the relative size of India. Especially after the acceleration in the Indian rate of economic growth in recent years, the country towers over its neighbours. The evolving theory concerning regional integration would suggest that it is advantageous for the smaller countries to work with the large ones to draw benefits from their larger markets. This has not happened in the case of South Asia mostly for political reasons..

The third reason for South Asia’s failure at achieving regional integration is the weakness of the institutions that could have supported it. It has to be accepted that for regional integration to work, the countries involved must be prepared to surrender some aspects of their sovereignty to regional institutions.The South Asians have been very reluctant to do this.

While the South Asian Association of Regional Cooperation, the SAARC, created a secretariat, this institution was given few powers. The countries that were members of the SAARC jealously guarded their sovereignty and did not allow the Kathmandu based secretariat to develop. All decisions were taken by the capitals with practically no initiatives coming out of the secretariat.

The member countries have gone to considerable length to prevent the SAARC Secretary General to gain stature. He is even denied a seat at the table when the heads of state and government meet for their annual summits.

To these three reasons I would add a fourth – the proliferation of regional institutions in South Asia. Some of this was done as an extension of the persistent hostility between India and Pakistan. The BIMSTEC, for instance is an institution for regional cooperation that was created in parallel to the SAARC. Although the initiative for its establishment came from Thailand, India took an active interest in its development. It was seen as “SAARC minus Pakistan” with Myanmar and Thailand added to the original formulation. Some of the regional institutions that have been created were set up to pursue very limited objectives. Almost all of them exclude Pakistan.

It is not often realised that there are enormous economic benefits of regional integration. South Asia could add at least one percentage point to its rate of economic growth by going in for regional integration much more seriously and aggressively than it has done in the past. It is clear that that has not happened with the creation of the SAARC and the decision taken in January 2004 at the summit in Islamabad to move towards a free trade area.

Although, the South Asia Free Trade Area, the SAFTA, was launched formally two years later and became effective on July 1 of that year, it has made little difference to trade among the countries of the region. Why has that not happened? Could this have occurred had the SAARC and SAFTA been supported by the right set of institutions?

Have the South Asian peoples and governments decided to which part of geography they belong? India is looking east while Pakistan continues to flirt with the Middle East. In the case of the latter religion sometimes dictates international economic relations more than pure economic interests.

In my view regional integration will only become possible when the South Asian countries grant transit rights to each other. This has become a highly contentious issue. The three countries that matter in this context – Bangladesh, India and Pakistan – have played politics by not allowing trans-country land trade through their territories.

There is also the need to determine what is the appropriate institutional set up required to promote regional integration in South Asia. How should the institutions that already exist be improved to make them more effective in terms of regional cooperation. In this context there are lessons to be learnt from other successful efforts at regional cooperation. As South Asia continues to make an effort to develop a customs union it would be useful to examine how this was helped by institutional development in Europe.

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Necessity or choice?

By Shahid Javed Burki
Tuesday, 15 Sep, 2009

WHILE contesting for the nomination of the Democratic Party and campaigning for the country’s presidency, Barack Obama took a position on the Afghan conflict that clearly distinguished him from his two rivals, Hillary Clinton for the Democratic Party’s nomination and John McCain for the presidency. Both Clinton and McCain had voted for the Iraq war resolution.

Obama gave a speech in which he strongly opposed the war, arguing that there was no reason for the US to get involved in Iraq. It was Afghanistan where it had to fight the Al Qaeda responsible for the 9/11 terrorist attacks. He called the Iraq conflict a war of choice and the one in Afghanistan a necessary war. If elected president, he promised that he would pull America out of Iraq while getting more involved in the conflict in Afghanistan.

Once he became president he stuck to his position. The United States has reached a point where it has to take important decisions on Afghanistan. Will the American political system allow Obama to lose more American soldiers in Afghanistan without clearly defining what Washington expects to achieve in that difficult country?

The sentiment against the continuous involvement of the US in Afghanistan is growing and while the president is fighting on a number of other fronts — especially trying to get Congress to reform the health system at home — he may not have much political capital left. Already his approval rating has fallen precipitously, faster than that of any other president in the first six months of his tenure. What are then the choices for Obama in Afghanistan?

One suggestion offered is that Obama should take his cue from former Texas Congressman Charlie Wilson who almost single-handedly won the support of the Democratic legislators who were deeply troubled by the Republican President Ronald Reagan’s involvement in the civil war in Nicaragua. Wilson persuaded his fellow Democrats that while involvement in the Central American country went against US interests and was not legal, the ‘war’ against the Soviet Union’s occupation of Afghanistan was just and in America’s strategic interests.

Will President Obama prove to be the Charlie Wilson of this story, confident of what he has been saying all along about Afghanistan and committed to victory over the Taliban? As the US withdrawal from Iraq proceeds and challenges in Afghanistan mount, it won’t be long before we learn the answer.

The Charlie Wilson analogy is interesting since it would mean having Obama clearly identify the enemy — in Wilson’s case it was the Soviet Union — and spell out the US mission in no uncertain terms. In Wilson’s case it was to throw the Soviets out of Afghanistan.

In August, Obama seemed to be moving in that direction. Al Qaeda and the Taliban

who supported it were the enemies and their removal not only from Afghanistan but also Pakistan was the twin mission. Speaking at a meeting of the Veterans of Foreign Wars in Phoenix, Arizona the president could not have been more explicit. “We must never forget,” he said of the conflict in Afghanistan, “This is not a war of choice. This is a war of necessity.”

The US would now “take the fight to the Taliban in the south and the east”, in effect to the borders of Pakistan. The area of American involvement was expanding. It was now both Afghanistan and Pakistan — the region for which the policymakers in Washington already had a shorthand, Af-Pak.

There are voices in the policy establishment that have begun to question these assumptions and the strategy based on it. “Wars of necessity must meet two tests,” wrote Richard Haas, the president of the Council on Foreign Relations in a recent article, “They involve, first, vital national interests and, second, a lack of viable alternatives to the use of military force to protect those interests.”

Haas has written a book on America’s two Iraq wars, the first launched by President George Bush in 1991 to expel Saddam Hussein’s forces from Kuwait. This was a short engagement. Bush did not go into Iraq and stopped his forces at the border. Haas calls that one a necessary war. The second Iraq war was started by the younger Bush in 2003 for no apparent reason. It is still not over six years later. This was a war of choice.

The Second World War, Haas says, “was a war of necessity, as were the Korean War and the Persian Gulf War. In the wake of 9/11, invading Afghanistan was a war of necessity. The United States needed to act in self-defence to oust the Taliban. There was no viable alternative. … But even if the United States were to succeed in Afghanistan — with ‘success’ defined as bringing into existence an Afghan government strong enough to control most of its territory — terrorists could still operate from there and would put down roots elsewhere. And Pakistan’s future would remain uncertain at best. Afghanistan is thus a war of choice — Mr Obama’s war of choice.

“In this way Afghanistan is analogous to Vietnam, Bosnia, Kosovo and today’s Iraq. Wars of choice are not inherently good or bad. It depends on whether military involvement would probably accomplish more than it would cost and whether employing force is more promising than the alternatives.”

Haas believes that at this point the war in Afghanistan has become a war of hard choice. There are alternatives available which Washington should try including limiting the possibility that Afghanistan could ever be used to launch another attack on the US. Pakistan could also be saved from collapsing if non-military tactics were deployed, including strengthening democracy and the country’s economy. The choices are clear and the right ones should be made.

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A year after the financial crash

By Shahid Javed Burki
Monday, Sep 21, 2009

THE outline of the story is by now well known. My interest is in the part that has only begun to catch the attention of analysts and historians.
This relates to the part governments around the globe should have played but didn’t since the prevailing economic philosophy believed that the markets were allknowing and there were fancy ways of spreading the risk that would not produce financial shocks. In fact, exactly the opposite of what was expected happened.

There is nothing unusual about the fact that the global economy has gone so quickly through first a boom and then a bust. Such cycles have happened before and they will happen again. Each boom and bust cycle has a different set of players. What is common between them is that they try to play the system to the very edge of its tolerance. Some do it to innovate and some to make profit. The first class of people helps the economies and societies in which they operate. The second only help themselves at the cost of societies. Such people and the booms and busts they produce are not unique to America.They are to be found in all parts of the world.

There were three sets of players who performed important roles in the crisis that began in the United States in the summer of 2007 and probably bottomed out in the early summer of 2009. The first were the Chinese who managed their economic system in a way that it produced much more than they could consume. The surplus was exported to the West, mostly to the United States.

The Chinese ran up large trade surpluses with the United States which left them with large amounts of dollars which were invested mostly in the United States. The flow of large quantities of funds from China kept the rates of interest low and produced enormous liquidity in the market. A significant part of this went into real estate. Loans were given out at low rates which increased the demand for houses and also their prices.

A large number of people who borrowed to buy houses couldn’t really afford to service the loans they obtained, especially when the variable rates on which they had borrowed increased. This is generally referred to as sub-prime lending.

The Chinese were not the only people who had surpluses to dispose off. Almost the same amount was available with the oil ex porting countries. Leading into 2006, the capital exiting Saudi Arabia and Kuwait alone matched the funds leaving China – approximately $200 billion per year.

For five years, from 2003 to 2008 when the price of oil climbed to unprecedented heights, the Middle East’s massive petrodollar outflows, combined with excess liquidity due to low interest rates fueled the housing bubble not just in the United States but also in Britain and the Middle East itself.

Once sub-prime lending became pervasive, a third player – in addition to the Chinese and the oil exporting countries – entered the picture: financial engineers working in various parts of the financial system. They invented a number of fancy products that went under the name of deriva tives.

The loans given out by banks to those who couldn’t afford to buy houses were bundled and sold to the institutions that could bring longer-term securities on their books. These were mostly investment banks, pension and hedge funds, and large endowments. Having purchased these products, these investors insured them with insurance companies. The entire financial system got involved.

A big problem with this spreading of risk was that while the banks were tightly regulated, investment and hedge funds were not. There was logic behind this system of regulation. Since the banks received deposits from ordinary citizens, the governments were anxious to protect them. The hedge funds and pension funds relied mostly on the relatively well-to-do. If they wished to take risks there was no reason why the governments should protect them.

The crisis shows how modern finance is developing strong linkages within the system and how quickly shocks get transmitted from one part to another. It shows how policy makers, no matter the level of their sophistication have nothing more than raw instincts to work on. And it demonstrates how the same set of events appears very different with the lapse of time and upon cooler reflection.

This is a good time to go over some of the main elements of the story since this is the first anniversary of the bankruptcy of Lehman Brothers, the fourth largest investment bank in the US financial system. The United States Treasury working with the Federal Reserve System, the central bank, pulled the rug from under Lehman after having rescued Bear Sterns. This happened on September 15. The stock market sank more than 500 points that day. The Reserve Primary Fund, a money market fund that held Lehman bonds, ‘broke the buck’, or dropped below $1 a share in net asset value.

Two days later, American International Group, the AIG, the world’s largest insurance company that provided cover for many Lehman products, collapsed and had to be bailed out with an extraordinary $85 billion loan from the US government. Stanley Morgan, another financial giant, was rumoured to be next. Banks all over Europe were teetering on the edge of an abyss.

Ever since that weekend, most people have viewed the decision by Henry M. Paulson Jr., then the secretary of the Treasury and Ben S. Bernanke, the chairman of the Federal Reserve, to allow Lehman to go bust as the single biggest mistake of the crisis. For instance, Christine Legarde, the French finance minister, called the decision horrendous. In speeches and articles and books commentators of every political stripe have pointed to the Lehman bankruptcy as the event that turned the subprime crisis into a full-blown financial meltdown.

Passage of time has changed the way the official action that led to the Lehman collapse is being viewed now. It is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although no body realised it at that time, Lehman Brothers had to die for the rest of Wall Street to live. Now that the crisis appears to be coming to an end, the governments are beginning to reform the system. The US is taking the lead but the going will be rough since so many vested interests are involved. President Barack Obama took the initiative by giving a speech in New York on September 14 to indicate why reform was necessary. The next step on the way will be the G20 meeting in Pittsburgh before the end of September.

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Addressing climate change challenges

By Shahid Javed Burki
Monday, Sep 28, 2009

THE global community is gearing up for Copenhagen where its leaders will gather to negotiate an international treaty on climate change this December.
The hope is that these talks will produce commitment from each nation that, collectively, would keep temperatures from rising two degrees Celsius above pre-industrial levels.

That will require deep cuts in emissions – as much as 80 per cent among industrialised nations – by mid-century. In order to reach agreement two countries will have to show great political resolve. Together China and the United States produce 40 per cent of the world’s greenhouse gas emissions. As The New York Times editorialised recently, “together they can lead the way to an effective global response. Or together they can mess things up royally.” In an op-ed article contributed to The New York Times as the first week of the United Nations General Assembly got under way, Prime Minister Gordon Brown identified climate change as one of the five major issues that confronted world and on which urgent action was needed.

“The next six months will test international cooperation more severely than at any time since 1945”, he wrote. “That may seem strange to say after a year of global crisis that has demanded unity on an immense scale, yet five challenges confront us and we cannot delay our responses”. Of these five, halting climate change was perhaps the most important one.

“This week starts with efforts to reinforce talks to secure a new international agreement on climate change in Copenhagen this December. Progress is too slow and a deal now hangs in the balance. But failure will increase the threat not only of humanitarian and ecological catastrophe but also of economic decline. Investment in energy efficiency and low- carbon energy resources will help drive economic growth over the next decade – as well as reduce dependence on imported oil and enhance energy security. Millions of jobs stand to be created as this investment expands – the low-carbon sector is now larger than defence and aerospace combined. But it is vital that we give confidence to such investment through a new international climate agreement”.

The previous one negotiated at Kyoto, Japan could not be put into effect because the United States under the leadership of President George W. Bush turned away from it. Kyoto was negotiated in 1997 by the administration of President Bill Clinton with Al Gore, his vice president, taking the lead. Bush who succeeded Clinton, was not persuaded that there was sufficient scientific evidence to support the view that human activity was leading to a change in climate. Many scientists had argued that if the change was not arrested and ultimately reversed, economic and social catastrophe would be the result.

South Asia would be one of the many world regions that would be seriously affected. Rise in the level of the seas would inundate large parts of Bangladesh. Under one scenario, as many as 30 million people of that country could be displaced.

They will seek refuge on higher ground of which there was not much in Bangladesh. They will need to go to the neighbouring India, posing serious problems for that country. But that would not be the only problem that climate change would bring to India. Pakistan and India will have to deal with the ultimate reduction in river flows that draw most of the water from snow and glacier melts in the mountain ranges. Melting glaciers will initially produce enormous floods endangering the irrigation systems that were built over centuries in these two countries. Once the glaciers had been reduced in size, these mighty rivers would begin to dry up. Much of Pakistan would revert to being a desert again.

While the science that supported the view that climate change produced by the emissions of green house gases posed a real threat to the global economy improved, President Bush refused to budge. This gave Al Gore, now a private citizen, to concentrate even more effort on educating the American public. His efforts won him a Nobel Peace Prize.

While campaigning for the presidency, Barack Obama promised to put his country in the lead of the effort that needed to be made if he were elected. Once in office, he developed what he began to call the “green agenda” for his administration. A number of regulatory steps were taken by his administration to reverse the decisions taken by his predecessor.

However, even with this change of heart in Washington, a new treaty on controlling climate change did not seem to be anywhere near the capacity of the global political system to deliver. On the eve of the UN meeting devoted to clearing the air before the world met again at Copenhagen, Rejendra Pachauri, the Indian scientist who had chaired the Intergovernmental Panel on Climate Change, warned that “science leaves us no space for inaction”.

Along with this panel of scientists report, a report written by a group of economists chaired by Britain’s Lord Nicholas Stern, had presented the costs and benefits of actions taken at this time. The calculus was clearly in favour of immediate action but international agreement did not seem to be in sight.

There were two reasons for this. It was by no means certain that the US Congress would be prepared to pass the needed legislation to move in that direction. Any international treaty that meant higher costs for the US industries would be a hard sell.

Second, a number of large developing countries – most notably China and India – were opposed to a treaty that would slow down the pace of their economic growth. It was the second resistance that Gordon Brown addressed in his article. A new treaty “will not be possible without the cooperation of developing countries”, he continued. “For this reason, Britain has suggested a programme of $100 billion a year by 2020, financed by wealthier countries and the private sector, to help poorer nations develop low-carbon economies”.

On September 22, the UN General Assembly was addressed by Presidents Hu Jintao and Barack Obama indicating their respective country’s approach to the problem that could not remain unaddressed. It was the Hu speech that surprised the climate community. He promised to reduce the rate of growth in carbon dioxide by a “notable margin” – at which, he implied, China would seek to reduce them in absolute terms. Among the promised actions was a government programme that would bring millions of acres of new land under forests. This was a small step but it was in the right direction. The question remains whether India would also go the same way.

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Where Pakistan stands

The economy is coming out of a deep crisis. Foreign reserves have been rebuilt. There is an indication that domestic investment has begun to pick up although FDI has yet to return.

By Shahid Javed Burki
Tuesday, Sep 29, 2009

IN describing Pakistan’s current situation I have sometimes used the metaphor ‘a perfect storm’. The storm appears to have passed but it has left a weakened country that continues to face a number of structural problems in a number of areas.
It would be useful to recall what produced the storm in the first place in order to see in which direction the country is headed and how it can be made to achieve the potential that still exists to ensure a better future for its 170 million people.

A year ago the economy was under great strain. Foreign reserves held by the State Bank of Pakistan were declining at an unsustainable rate. There was fear that if help did not arrive in time Islamabad would have to default on some of its foreign obligations thus bringing the country to the point of bankruptcy. The drain on foreign reserves was the result, in part, of the increase in the price of oil.

In July 2008 the closing price per barrel of oil touched $147.27 three times the price a year earli er. Oil has become an important commodity for Pakistan as the country’s dependence on it for generating electricity has increased.

The increase in the price of oil and a sharp reduction in foreign exchange reserves meant that the country was not able to import as much fuel as needed. This led to serious power shortages which, in turn, resulted in loadshedding that lasted for several hours a day during the peak of the summer. The summer of 2008 was warmer than normal adding to public discomfort. It also took a heavy economic toll. According to one estimate, the power crisis cost the economy seven per cent of industrial output and two per cent of the gross domestic product.

The strain on the economy was felt precisely at the time when the process of political transition was going through many difficult motions. The elections held in February 2008 had made clear that the military would have to give up its political control. Under President Pervez Musharraf, the military had made a desperate attempt to keep its grip on the lever of power.

On Nov 3, 2007 the president had introduced a new ‘constitutional order’ which had given him additional powers. The president felt that he needed that power to discipline the judiciary which, backed by a remarkable movement led by the legal community, had gathered enough strength to try and bring the executive in line.

This movement was launched when President Musharraf dismissed Chief Justice Iftikhar Chaudhry earlier that year. Chaudhry was reinstated by the courts but was out again in November after the emergency.

Emboldened by its earlier success in support of the Chief Justice, the legal community agitated against what it called President Musharraf’s second coup. Supported by the civil society, it put enough pressure on the president for him to yield and give up the powers he had assumed. The final blow was delivered by the February 2008 elections.

It took the politicians several months before they were able to get President Musharraf out of his office. It took that long for the reason that the main political parties were not able to reach an agreement on the shape of the political structure they wished to build in the country.

Should Pakistan choose to be a parliamentary democracy with all power resting in the National Assembly or should it be a hybrid system in which power was shared between the president and the parliament? The question remains unanswered.

Unsettled economic and political systems gave space to the forces of Islamic extremism. They were able to expand their reach by the use of force and gained control in several areas in the northwest including Swat and its adjoining districts. It was at that time that the military was authorised by the civilian leadership to start an operation that would rid the area of the militants and later re-establish the writ of the state over the tribal areas. The first part of this mission has been achieved.

The economy is coming out of a deep crisis, helped in part by the International Monetary Fund, the World Bank and the Asian Development Bank. A group of countries that Islamabad calls the Friends of Pakistan met in Tokyo a few months ago and pledged significant amounts of resources. The US is set to provide substantial assistance — to the tune of $1.5bn a year — which will be sustained for at least five years. Foreign reserves have been rebuilt to the point where the country can comfortably finance its large trade deficit. There is some indication that the level of domestic investment may have also begun to pick up although foreign direct investment has as yet to return.

On the political side, tensions between the two mainstream parties have heated up somewhat but have not yet reached the point at which the stability of the system could be seriously threatened. It appears that the main political leaders are anxious not to do anything that would tempt the military to reassert itself. But as already indicated the most significant development has been on the terrorism front. Where will Pakistan go from here? To answer that question we should look at how the country got into such a troubled state to begin with, a subject that will be focused on in the coming weeks. ¦

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